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Setting Up an Invoice Factoring RelationshipBy Kent Harlan You need to factor your invoices now because your company has received a new contract for services, which requires cash to pay suppliers, employees, and additional expenses. You could probably pledge personal or corporate assets to get a bank loan, but you\'re hesitant to go that route. First, it takes time you can\'t afford to get the loan in front of a committee and to get it closed. You are also leery about tying up personal or business assets to get working capital. Many in the financial community view factoring in a negative light. They will tell you it is too expensive. When I\'m confronted with that argument, I don\'t disagree. It is more expensive than conventional financing. Unfortunately, not everyone qualifies for bank loans. Factoring is appropriate for two general groups of companies: those that are financially distraught and need a quick infusion of cash to continue operating and those that are growing so quickly, bank lines can\'t keep up with growth. If your company is unable to achieve conventional financing, shouldn\'t you at least entertain the idea of going after alternative methods? You should perform a cost-benefit analysis. Let\'s say you have the opportunity to sell a new line of products for a customer which will obviously require additional labor, materials and overhead. After being turned down for a bank loan, you take a look at factoring. The decision-making process should focus on the level of incremental profits derived from the contract after paying factoring fees of 2-4% per month. What factoring can do for your company There are many advantages to using factoring as a way to acquire much-needed working capital. Unlimited capital: Funding is only limited by the pool of receivables created by the company. Financial condition not relevant: The most important consideration is the financial situation of the company\'s customers, rather than that of firm itself. Factoring doesn\'t hurt your balance sheet: Factoring is not a loan. It is the purchase of your receivables at a discount. Therefore, it doesn\'t effect your balance sheet. Professional collections: Most factoring companies give the customer the option to collect their past due receivables. However, factors employ professional and courteous collectors for that purpose. Take advantage of purchase discounts: Advances on receivables allows company to defray factoring fees by getting early-payment discounts on purchases. Establishing a factoring relationship The process of receiving cash advances for receivables is a relatively simple one and can be completed within a matter of days. Here are the steps required: 1. Complete the factoring application- The form requires basic data about the company, its officers, banking references, and an authorization to release information. Supplemental schedules such as a detailed aging schedule, master customer list, articles of incorporation, and a sample invoice must be sent with the application. 2. Letter of intent: After processing the application and determining that the company is a good candidate for factoring, the factor will issue a letter of intent. The LOI spells out the proposed terms of the contract, including the advance rate (the amount of cash advanced to the company as a percentage of the accounts receivable factored), the fees to be charged, and the length of the contract. These terms expressed by the LOI are conditioned upon due diligence. 3. Acceptance of LOI and due diligence: If the company accepts the terms on the LOI, a check must be submitted for due diligence costs. The amount varies from factor to factor, but is usually between $250 and $500. Due diligence includes checking the credit of customers, making sure there are no liens on the accounts receivable, and ensuring there are no federal tax liens against the company. As a result of the investigation, more specific terms are determined and a formal contract is drawn up. 4. Signing of the contract: Each party signs the contract, which lays out in legal language the terms and conditions of the factoring relationship. These terms were outlined in the letter of intent and also includes other items such as "concentration", which may limit the amount of invoices factored by any one customer. 5. Start receiving instant cash: After the contract is executed, you can immediately begin submitting invoices for completed goods or services. The funds will be wired directly into the company\'s bank account. Factoring is generally not a long-term financial solution, but it can provide much-needed working capital for start-ups and other companies that aren\'t "bankable". Kent Harlan has been a CPA since 1984 and has provided consulting, accounting and financial services to several industries. He is the owner of Ozarks Capital Funding, LLC, a Springfield, MO based company offering financing in the areas of accounts receivable factoring, equipment leasing, asset based lending, and funding for healthcare providers. Does your business need working capital? Click here for a quick factoring quote. EMAIL: kenth@ocflink.com
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