A factoring company is a company that offers financial transactions and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.
Factoring is also seen as a form of invoice discounting in many markets. With factoring, accounts receivable is discounted to allow the buyer to make a profit upon the settlement of the debt. Factoring transfers the ownership of accounts to another party that then chases up the debt.
Statistics have it that in the United States there are over 862 factoring companies (invoice discounting companies) employing about 5,420 employees, and the industry rakes in over $5 billion annually.
Steps on How to Start a Factoring Company
Table of Content
Conduct Market Research
The first step in the market research process for your factoring company is to develop market-based research questions in line with your overall business goal and objective. In this regard, you should source information that will help you maximize your business, give you easy access to reliable business techniques and processes that will help you operate your factoring company with less stress, and help you build the business to profitability within the shortest time frame.
a. Who is the Target Market for a Factoring Company?
- Importer and Exporters
- Transport and Logistics companies
- Entrepreneurs and Start-Ups
b. Is a Factoring company a Profitable Business?
Yes, a factoring company is a profitable business because there are loads of startups and medium-scale businesses in the United States that rely on factoring companies to help them accelerate their cash flow.
c. Are There Existing Niches in the Industry?
There is no niche area in factoring but it is common for some factoring companies to specialize in any of the following;
- Real Estate Factoring
- Medical Factoring
- Haulage (Transport Factoring)
- Construction Factoring.
d. Who are the Major Competitors?
- RTS Financial
- TCI Business Capital
- Riviera Financing
- Triumph Business Capita
- Paragon Financial
- Wells Fargo & Company
- HSBC Invoice Finance (UK) Ltd
- NatWest Group Plc
- Bibby Financial Services Ltd
- Lloyds Bank Commercial Finance Ltd.
- Tenet Financial Group
- Liquid Capital Corp.
- Interface Financial Group
- United Check Cashing®
- Expense Reduction Coaching
- RMH Business Solutions, Inc.
- The Tayne Law Group
e. Are There County or State Regulations or Zoning Laws for a Factoring Company?
No, there are no county or state regulations or zoning laws for a factoring company, but players in this industry are expected to work with the existing regulations governing similar businesses in the county or state where their business is domiciled.
f. Is There a Franchise for Factoring Company?
Yes, there are franchise opportunities for a factoring company. Here are some of them;
- Tenet Financial Group (Initial Investment: $40,000).
- Liquid Capital Corp. (Total Investment: $200,000)
- Interface Financial Group (Initial Investment: $86,800)
- United Check Cashing® (Initial Investment: $226,000)
- ProfitPlus Accounts (Initial Investment: $30,000)
- TaxLeaf (Initial Investment: $40,000)
- Expense Reduction Coaching (Initial Investment: $66,000)
- RMH Business Solutions, Inc. (Initial Investment: $41,050)
- The Tayne Law Group (Initial Investment: $83,820)
- Supporting Strategies (Initial Investment: $76,930).
g. What Do You Need to Start a Factoring Company?
- A Feasibility Report
- Business and Marketing Plans
- Business Licenses and Permits
- Office Space
- Computers, Laptops, and Servers
- EIN (Employer Identification Number)/Federal Tax ID Number.
- A Corporate Bank Account
- Hardware Equipment and Tools
- Software Apps
- Startup Capital
Memorable Business Name ideas for a Factoring Company
- Boom Books© Factoring Company, Inc.
- Moore® Factoring Firm, LLC
- Pence© Factoring Company, Inc.
- All Solutions® Factoring Company, Inc.
- Penny Wise™ Factoring Company, Inc.
- Smith™ Factoring Company, LLC.
- Money Now© Factoring Company, LLC
- Cash Down® Factoring Company, Inc.
- Hilary Jorgen© Factoring Company, Inc.
- Kelly Gray© Factoring Company, Inc.
- Mike Kester® Factoring Company, Inc.
- Union Group® Factoring Company, Inc.
- TM Morris® Factoring Company, Inc.
- Tripple Pay® Factoring Company, Inc.
- Nathan Fred® Factoring Company, Inc.
- Rowland Hyden© Factoring Company, Inc.
- Scene Fit™ Factoring Company, LLC
- Access Group® Factoring Company, Inc.
- West Payment® Factoring Company, Inc.
- Zion Group™ Factoring Company, Inc.
Register Your Business
a. What Type of Business Structure is Best for a Factoring company?
Even though there are several options when it comes to the business structure of a factoring company, the one that most players in this line of business consider is an LLC. It is common to consider an LLC because providers want to protect themselves from lawsuits.
Please note that an LLC will need an EIN if it has employees or if it will be required to file any of the excise tax forms listed below.
b. Steps to Form an LLC
- Choose a Name for Your LLC.
- File Articles of Organization.
- Choose a registered agent.
- Decide on member vs. manager management.
- Create an LLC operating agreement.
- Comply with other tax and regulatory requirements.
- File annual reports.
c. What Type of License is Needed to Open a Factoring Company?
- General Business License
- Zonal Permits (Applicable in some cities)
- Signage Permit
d. What Type of Certification is Needed to Open a Factoring Company?
- Factoring Quality Certificate
- FCI Certification
e. What Documents are Needed to Open a Factoring Company?
- Business and liability insurance
- Federal Tax Payer’s ID
- State Permit and Building Approval
- Certificate of Incorporation
- Business License
- Business Plan
- Employment Agreement (offer letters)
- Operating Agreement for LLCs
- Insurance Policy
- Contract Document
- Company Bylaws
- Memorandum of Understanding (MoU)
f. Do You Need a Trademark, Copyright, or Patent?
If you are considering starting a factoring company, you may not have any need to file for intellectual property protection or trademark. This is because the nature of the business makes it possible for you to successfully run it without having any cause to challenge anybody in court for illegally making use of your company’s intellectual properties.
Cost Analysis and Budgeting
a. How Much Does It Cost to Start a Factoring Company?
When it comes to starting a factoring company, the startup costs could range from $50,000 to over $500,000 depending on how big you want to start the business. Please note that this amount includes your working capital and of course, the salaries of all the staff for the first month of operation.
b. What are the Cost Involved in Starting a Factoring Company
- The total fee for registering the business in the United States of America – $750.
- Legal expenses for obtaining licenses and permits as well as the accounting services (software, P.O.S machines, and other software) – $3,300.
- Marketing promotion expenses for the grand opening of the factoring company for $3,500 and as well as flyer printing (2,000 flyers at $0.04 per copy) for the total amount of $3,580.
- The total cost for hiring a business consultant including writing a business plan – $2,500.
- The total cost for the purchase of insurance (general liability, workers’ compensation, and property-casualty) coverage at a total premium (initial (first) premium) – $2,400.
- The cost for renting or leasing operational office space – $45,000.
- Other start-up expenses including, commercial satellite TV subscriptions, stationery ($500), and phone and utility deposits ($2,800).
- Operational cost for the first 3 months (salaries of employees, payments of bills and software renewal fees et al) – $15,000
- The cost for the purchase of software apps: $50,000
- The cost for store equipment (cash register, security, ventilation, signage) – $1,750
- The cost of purchase and installation of CCTVs: $2,000
- The cost of launching a website: $2000
- Miscellaneous: $2,000
c. What Factors Determine the Cost of Opening a Factoring Company?
- The size of the factoring company
- The choice of location
- The required licenses and permits
- The type of facility
- The additional service offerings
- The cost of hiring and paying a business consultant and attorney
- The cost for branding, promotion, and marketing of the factoring company
- The cost for furnishing and equipping the facility
- The cost for insurance policy covers
- The cost for registering the business
- Source of your supplies and ongoing expenses
- Cost of recruiting and training your staff
- The cost of the purchase and customizing of uniforms
d. Do You Need to Build a Facility? If YES, How Much Will It Cost?
You don’t need to build a facility for your factoring company because it is a business that can be operated from a leased or rented office space or home office. You may just decide to operate from your home and just lease shared office space for corporate fronting.
e. What are the Ongoing Expenses of a Factoring Company?
- Utility bills (internet subscriptions, phone bills, signage and software renewal fees et al)
- Transport and logistics
- Salaries of employees
f. What is the Average Salary of your Staff?
- Chief Executive Officer (President) – $45,000 Per Year
- Human Resources and Admin Manager – $35,000 Per Year
- Batch Processor / Data Entry Specialist – $34,500 Per Year
- Factoring Account Manager – $32,000 Per Year
- Freight Factoring Business Development Officer – $30,000 Per Year
- Processor · Junior Underwriter – $30,000 Per Year
- Client Service Executive (Help Desk Office) -$28,000 Per Year
g. How Do You Get Funding to Start a Factoring Company
- Raising money from personal savings and sale of personal stocks and properties
- Raising money from investors and business partners
- Sell shares to interested investors
- Applying for a loan from your bank/banks
- Source for soft loans from your family members and friends.
Write a Business Plan
a. Executive Summary
Rowland Hyden© Factoring Company, Inc. is a registered and licensed factoring company. The business will be based in Springfield – Illinois. We were able to secure a well-positioned and standard office facility in one of the most patronized office complexes in Springfield. We are aware that to run a standard factoring business can be demanding which is why we are well trained, certified, and equipped to perform excellently well in our chosen line of business.
b. Products and Service
- Invoice discounting
- Debt financing.
c. Mission Statement
Our mission is to provide professional and highly reliable factoring services that will help businesses generate the required upfront cash flow they need to run their businesses seamlessly.
Our vision is to build a factoring company that will become the number one choice for individuals, families, and corporate clients in the whole of Springfield – Illinois.
d. Goals and Objectives
The goals and objectives of the factoring company are to provide short-term financing in exchange for business invoices or accounts receivables. Operators mainly generate revenue through factor fees or the difference between the price paid for the invoice and the money received from debtors.
e. Organizational Structure
- Chief Executive Officer (President)
- Human Resources and Admin Manager
- Batch Processor/Data Entry Specialist
- Factoring Account Manager
- Freight Factoring Business Development Officer
- Processor · Junior Underwriter
- Client Service Executive (Help Desk Office)
a. SWOT Analysis
- Effective structure in place to help consumers enjoy invoices or accounts receivables transactions
- Highly experienced and qualified employees and management
- Highly secured payment platform
- Access to finance from business partners
- Water-tight strategies on how to expand beyond the major markets
- Good returns on investment for our investors.
- Financial Constraints
- A new business that will be competing with well-established factoring companies and traditional banks
- Inability to retain our highly experienced and qualified employees longer than we want
- Partnerships and mergers between established companies and factoring startups are becoming more frequent.
- Good support structure for factoring companies in the United States of America.
- The arrival of a new factoring company within our market space
- Unfavorable government policy and regulations
- Differences in management and culture are the biggest barriers to integrating factoring startups into traditional companies
- Liability problems
- Continuously changing consumer demands especially as it relates to how they expect factoring companies to serve them.
b. How Do Factoring Companies Make Money?
Factoring companies generate revenue through factor fees or the difference between the price paid for the invoice and money received from debtors.
c. Payment Options
- Payment via bank transfer
- Payment via credit cards
- Payment via online bank transfer
- Payment via check
- Payment via mobile money transfer
- Payment via bank draft
d. Sales & Advertising Strategies
- Introduce your factoring company and the services your offer by sending introductory letters alongside your brochure to corporate organizations, construction companies, haulage companies, medical billing companies, and other key stakeholders throughout the city where your factoring company is located.
- Advertise on the internet on blogs and forums, and also on social media like Twitter, Facebook, LinkedIn to get your message across
- Create a basic website for your business to give your business an online presence
- Directly market your services
- Advertise your business in community-based newspapers, local TV and radio stations
- List your business on yellow pages ads (local directories)
- Encourage the use of word-of-mouth marketing (referrals)
a. How Much Should You Charge for your Service?
A factoring company may charge 2 percent for the first 30 days and 0.5 percent for every 10 days that the invoice remains unpaid. Fees are often referred to as invoice discounting rates. Some factoring companies offer a flat fee structure where a one-time fee is charged upfront.
b. How Much Profit Do Factoring Company Owners Make a Year?
A small factoring company owner will make between $50,000 to over $100,000 per year.
c. What Factors Determine the Amount of Profit to Be Made?
- The capacity of the factoring company
- The location of the factoring company is covering
- The management style of the factoring company
- The business approach of the factoring company
- The advertising and marketing strategies adopted by the factoring company
- The number of years the factoring company is in business
d. What is the Profit Margin of a Factoring Company?
The profit margin of a factoring company is not fixed. It could range between 10% to 15% of the fee income earned by the funder per month.
e. What is the Sales Forecast?
Below is the sales forecast for a factoring company. It is based on the location of the business and other factors as it relates to such startups in the United States;
- First Fiscal Year (FY1): $350,000
- Second Fiscal Year (FY2): $480,000
- Third Fiscal Year (FY3): $600,000
Set Up your Office
a. How Do You Choose a Perfect Location for Factoring Company?
- The demography of the location especially as it relates to small and medium scale businesses
- The demand for the services of factoring companies in the location
- The purchasing power of businesses and the residents of the location
- Accessibility of the location
- The number of factoring companies in the location
- The local laws and regulations in the community/state
- Traffic, parking and security et al
b. What State and City are Best to Open a Factoring Company?
- Brattleboro, Vermont
- Tucson, Arizona
- Silver Spring, Maryland
- Rowland Heights, California
- Portland, Oregon
- Richmond, Virginia
- Green Bay, Wisconsin
- Plano, Texas
c. What Equipment is Needed to Operate a Factoring Company?
You should be prepared to purchase software applications, computers/laptops, servers, storage, and internet facility, telephone, fax machine, and office furniture (chairs, tables, and shelves) amongst others, and all these can be gotten fairly used.
When it comes to hiring employees for a standard Factoring company, you should make plans to hire a competent Chief Executive Officer (President), Human Resources and Admin Manager, Batch Processor/Data Entry Specialist, Factoring Account Manager, Freight Factoring Business Development Officer, Processor – Junior Underwriter and Client Service Executive (Help Desk Office).
Launch the Business Proper
You can decide to open your factoring company with a party, though it is not compulsory. You can choose to do a soft opening if you are operating on a low budget or you can go for a grand opening party.
The bottom line is that with a proper launching of the factoring company, you will officially inform people in your city that your factoring company is open for business.
a. What Makes a Factoring Company Successful?
- Ability to identify good deals
- Willingness to take chances
- Customer-centric business approach
- Good marketing
- Strong vision
- Passionate leadership
- Ability to Innovate
b. What Happens During a Typical Day at a Factoring company?
- The office is open for the day’s work
- The To-do list is reviewed
- Employees go straight to their job description
- Marketers go out to market the service offerings of the company
- Reports are written and submitted to superior officers
- The business is closed for the day.
c. What Skills and Experience Do You Need to Build a Factoring Company?
- Excellent marketing skills
- Excellent computer skills
- Ability to Pay Attention to Details
- Good managerial and human development skills
- Good Accounting and Bookkeeping Skills
- Team-building & Interpersonal Skills.
- Excellent communication and negotiation skills.
- Organizational skills.
- Problem-solving ability.
- Good Supervisory skills
- Experience in managing factoring related services business
- Experience in managing people
- Experience in business administration
- Experience in handling relevant software.