The usual version of this article is written for a business deciding which factor to use. This is the version for the factor, because a funding operation makes more consequential choices than its clients do and gets far less written for it.
You choose an operating platform. You choose a bank or a rediscount lender. You choose credit information sources, payment rails, participation partners, counsel, and whoever conducts your field exams. Every one of those decisions determines what your operation can do on a bad day, and every one of them is normally evaluated on what the counterparty is like on a good one.
The method, before the specifics
Feature comparison is close to useless once a market matures, because every serious participant has read the same requirement documents and can name the same capabilities. What separates them is behaviour under stress, and stress behaviour is knowable in advance if you ask about it directly.
Four questions work on every partner class in this list.
- What happens when it fails? Not whether it fails. What the failure looks like from your side, how you find out, and what you can still do while it is failing.
- What does it refuse to do? Every genuinely reliable counterparty has a list of things it will not do, and can tell you what they are without checking. A partner that will accommodate anything has no controls, and you will discover which ones were missing at the worst moment.
- What does it cost to leave? Not the exit fee. The practical cost: what you take with you, in what form, and how long you can still read what you are leaving behind.
- Who is accountable, by name? In a bad week, whose telephone number do you have, and does that person have the authority to decide anything.
Add one habit. Test the bad case, never the good case. Any partner can demonstrate the happy path. Ask them to demonstrate the exception.
The operating platform
This is the largest of the decisions because it is the hardest to reverse. Some specific things to ask for, all of which can be done in a working session rather than a presentation.
Ask what it refuses. Have the presenter, using their own account, request a funding release and then approve it themselves. Watch whether the refusal is specific, whether it names the policy, and whether the attempt is recorded. Then ask which roles can configure that rule away, because a control that can be switched off under pressure is a control that will be.
Ask what appears when a source is unavailable. Turn off a credit source or a bank feed and look at the screen. You want the source named and the state declared. You do not want a zero, a blank, or yesterday's figure presented as current. A number that looks like a measurement and is actually an absence is the most expensive interface element in this industry.
Ask it to show you a change since yesterday, on a book it has only just seen. A platform that stores observations will say it has no prior reading and offer to take a first one. A platform that produces a confident change figure from a single snapshot invented a yesterday, and it will do that on your book every day.
Ask what proves any number on any screen. Count the movements from the conclusion to the underlying records, and notice whether you lose the conclusion on the way. Your credit officers will not use a figure they cannot defend to your bank.
Ask about the exit before you ask about the price. What do you take, in what format, and does the audit history come with it. A record you cannot take with you was never really yours, and the answer to this question tells you a great deal about how the vendor thinks about the relationship.
Ask them to re price a sample of your settled invoices. The most informative diligence request available in this category and the one most likely to be deflected. It tests the conversion process, the fee engine, and the willingness to show you a difference list before you have signed. The mechanics are set out on migration, and in more detail for operations running FactorSoft today on switching from FactorSoft.
You will also encounter comparison pages published by vendors about their competitors, some of which carry striking statistics with no source attached. Treat an unsourced number as information about the vendor rather than information about the market. It tells you what they are prepared to publish when nobody is checking, which is a useful thing to learn early.
The funding line
Your bank or rediscount lender is a partner whose behaviour in a downturn matters more than its rate.
Ask what reporting cadence they will require, and whether your systems can produce it without a person assembling it by hand each time. Ask which conditions in the facility are measured continuously rather than at reporting dates, because those are the ones that can be breached without anyone noticing. Ask what they do when a covenant is approaching rather than breached, since the useful relationship is the one where pressure is visible early to both sides.
Then ask the question people avoid: what happened with their last borrower who had a bad quarter. The answer, or the refusal to answer, is the most informative thing you will hear.
Credit information sources
Coverage is the whole question, and coverage means coverage of your debtor population rather than coverage in general. A source with excellent data on large public companies is of limited use to an operation funding regional freight brokers.
Establish what a no hit means. Absence of information is not a negative signal and it is not a positive one, and a source that presents an empty result as though it were a clean result is dangerous. Establish recency, because a file that has not been updated recently is a historical document rather than a current opinion. Establish what you may do with the information contractually, which frequently turns out to be narrower than what your team assumes.
Payment rails and banking
Ask about cutoffs, the recall procedure and how long a recall realistically takes. Ask what controls sit around changing a beneficiary account, and satisfy yourself that a change cannot be made through the same channel that requested it. Ask what happens on the day the rail is unavailable, because that day will come and your clients will still expect funding.
Lockbox arrangements deserve their own examination. A facility with notification but no dominion of funds has a control gap that only becomes visible when a client is under pressure.
Participation partners and examiners
For sub participation, the credit conversation is usually straightforward and the operational one is not. Two sets of books must keep agreeing over the life of the exposure, and the reporting burden lands on whoever has the weaker system. Establish who produces the numbers and what happens when the two ledgers disagree.
For field exam firms, ask to see a redacted report before you engage them. Reports vary enormously in whether they produce findings that change your eligibility rules or a document that confirms what you already believed.
Where this leaves the shortlist
Score every candidate on failure behaviour, refusals, exit cost and named accountability, and you will usually find the ranking differs from the one the feature matrix produced. That is the point. The feature matrix describes the good day, and you are not buying the good day.
If you want the same argument applied to platform categories rather than to partners generally, how we compare sets out recording systems against decision systems, including a section on where we are the wrong answer. The cost side is on pricing, and the vendor review material is on security and controls.