Can you answer Chad D’s question about Factoring?:

Thank you.

Account Receivables Collection

Many businesses face a typical problem of long delay ranging up to 60-90 days or even more to receive the payments for the job completed and delivered. In their attempt to achieve the next big order the businesses ignore the need for funds for this next order. So how do you arrange for capital required for various business purposes? Factoring is one of the solutions for it.

Factoring is a financial tool that allows you to get your pending invoices paid in two days. Factoring includes selling your invoices at a discount for immediate cash. The factoring company will collect payment from the client later and you are provided with immediate cash so that you can use it to pay the suppliers and for other business activities. It is not a business loan. It differs from a bank loan in three ways; firstly it is the value of the receivables that is considered and the creditworthiness of the company.

It is not a loan as it is the purchase of the receivables (which are assets), and it involves three parties, the seller who has to receive money, the debtor who has to pay the money and the third is the factor, which is the financial organization that collects money from the debtor. The major advantage of factoring is that as the sales grow, the borrowing capacity grows. This funding is necessary for growth. Also no other asset needs to be used for acquiring funds.

How does factoring work? The factoring company lends the borrowing company a certain percentage of each invoice that it issues and then collects the invoice on its due date and pays the balance to the company. The factoring company charges some factoring fee, a small percentage of the invoice amount and interest on the amount borrowed.

A company, which opts for a factoring deal should ensure that they inform all the related parties regarding it. Initially it would be the existing debtors, which will be taken on, thus involving large payment being made right in the beginning. Entering into a factoring deal is quicker than arranging for finance by any other means. The factoring companies are often more commercial than the lending institutions and help client companies to find a good solution. The biggest consideration for the factoring company is the financial reliability of the two companies. If the debtor pays the bills on time then the factoring company offers a better factoring fee rate to the seller.

Factoring is suited for those companies, which are growth oriented, need funds to increase production, add new clients and improve profits. Compared to other options for loan, which consider the assets, and other repayment options, factoring emphasizes on ability of the debtor to pay. The seller can also use this as additional working capital or pay off any tax liability. The advantage of factoring is that the seller can arrange to buy in bulk and avail of discounts from the suppliers thus concentrating on increasing production and the profitability. Factoring is cost effective as the cost involved is dependent on the application and has a specific fee structure with no hidden costs.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

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Can you answer dasielady’s question about Factoring?:

I work in the accounting department at a large law firm. I have some ideas on how to estimate cash flow in the coming year, but would like more suggestions. One way I am already doing is an excel spreadsheet that will examine the aging on recievables from last year, and the amount uncollected. Then take those percentages of beginning A/R (ie: what % of Januarys recievables were collected in Jan, then Feb, then Mar, then written off) and apply them to projected billables for the coming year. Does anyone have any other good suggestions?

Non Recourse Factoring

I have created this article to give you straight forward content hoping to provide information into some of the things that factors are looking for when qualifying a prospect before entering into a financial relationship with them.

Lets face it, your time is very valuable and you do not need to waste it filling out applications or talking on the phone when you may be able to identify issues in this article that would prohibit you from being able to enter into a factoring relationship.

I also created this article because we want your business; however we want to earn it.

So if you find out that this information is helpful in your process of seeking out a financial solution for your company, we would love the chance to set you up with one of our highly recommended factoring companies. Even if you find out you do not qualify for factoring right now, you may be able to clear up the issues and qualify at a later time. We would love to be your choice then as well to help resolve your working capital issues.

Some of this information will be basic and you may already be familiar with it, however some may not. Just read through the article and I am sure you will find some helpful information.

We want to thank you up front for giving us a chance to serve your company. Lets get started.

Lets take a look at what factoring is:

Factoring is a form of financing where a business sells its creditworthy commercial accounts receivable to a financier known as a factor.

This is a good starting point; you need to be invoicing creditworthy businesses for your product or service. Your product must be delivered and your services rendered (no pre-bills). If they are not creditworthy and you are already having collection problems, a factoring company will not be interested in purchasing those receivables. You may need a collections service.

How much do you invoice each month:

If you are invoicing under $10,000 a month this will limit the number of factoring companies that will enter into a relationship with you. If you are speaking with a factor, let them know up front what your monthly volume is and find out if they are willing to work with companies of your size. This could save you from filling out an application and wasting your time with that particular factor.

How many customers do you invoice:

Factoring companies prefer to fund companies with more than one customer; this helps them lower their risk. If you have just one customer, the factoring will have a concentration issue, meaning if something happens to your customer they do not have any other receivables from other customers to recoup their money. Let the factoring company know this up front as well. Some factors will not work with you if you only have one customer. (If your one customer is large and stable this will help).

Do you have any financing currently in place:

If you have an existing loan or line of credit you need to find out up front if the bank has a UCC-1 against your receivables. The factoring company must have 1st position on your receivables to be able to enter into a financing relationship with your company.

I would suggest if you have a current loan or line of credit to double check and make sure of this.

I have had many businesses tell me that the bank did not have their receivables as collateral and then proceed through the application process and return the contract.

The factoring company would begin due diligence and the lien search would return a current UCC-1 on the receivables. Many times the customer does not realize the bank placed a blanket lien on their company covering all assets, including the accounts receivable.

If this is the case, you still may qualify for factoring. If your loan or line of credit is small enough, the factor may be able to pay off your loan or line of credit out of your 1st advance and the bank has no choice but to subordinate (release) the receivables. If not, they may have enough collateral that they will allow the factoring company to have 1st position on the receivables and allow you to get the needed capital for your company.

So if you have current financing, check on this issue. You may find out the bank will step up to the plate and allow you access to more funds when they realize you are about to leave.

This has happened many times.

Also be aware that our factoring companies can help negotiate a subordination, so discuss this with us if you need more clarification on this topic.

Your aging report:

Your aging report is very important to a factoring company; this is the pulse on your cash flow. An accurate detailed accounts receivable aging report should be aged from invoice date and not due date. Some companies accounting software is set up to age the receivables from due date, this will reflect an inaccurate report to the factoring company.

If you have an unhealthy aging report you will have a hard time qualifying for factoring. Plus the fees you pay to a factor increase as the days outstanding increase.

Make sure you have a cash flow issue and not a collections issue.

Remember, creditworthy customers are the key.

Outstanding taxes, liens, judgments, litigations, felony convictions or bankruptcy:

If you have any of these issues, it does not mean you cant qualify for factoring, you just need to be forthcoming at the beginning and find out if the issues are too complex for the factoring company to work through. This may save you some time.

Are you incorporated:

Some factors will not work with Sole Proprietors, others will, we have some that do. Find out at the beginning of the conversation.

Financial Statements:

Some factors will require financial statements and others will not.

Providing financial is usually where you will find the most aggressive rates available.

If you do not want to deal with providing financial statements, ask up front if they are required. We have programs available that requires no financials.

Personal Credit

Even though your customers are the primary focus, your personal credit is taken into consideration. If your personal credit has taken some severe hits recently, discuss this up front with the factor to find out how much it will be taken into consideration.

This covers some of the basic, I hope it helps!

Thanks for reading.



Thanks to Mark Little for contributing this article to our Factoring blog:

Cash Flow Funding

If you are an exporter of goods to other countries, then at some time or the other, you must have faced a cash crunch and wished that you had ready cash in hand, instead of having to wait for your customer’s payments to arrive. Well, you now have a way of getting ready cash against your international invoices. Here’s how.

Due to heavy competition, you could have been forced to offer credit to your customers. If you have exported your goods on credit, then your local export factoring company will “buy” your receivables off you after you have dispatched the goods to your customer. They will send these receivables to an import factoring company situated in the same country as your customer, who will then do the follow up in getting your payment released on the due date. So, in international factoring, two factoring companies are normally involved.

You will get around 90% of your invoice amount immediately within a few days, which will be wired to your account by your factoring company. The balance will be transferred to your account, once your customer has released the payment on the due date. This last payment will be minus the factoring company’s charges for providing you this service, which is normally 2.5% to 4% of the total invoice value. This percentage of charges will depend on the credit period you have given to your customer, the credit rating of your customer as decided by your factoring company, and the total amount of business, value wise, which you provide to your factoring company.

These factoring companies can also take care of your collection of payments from your customers. This can be a boon for you, since you can now concentrate more on sales rather than worry about collections. The factoring company will send you regular updates of the receivable reports of your customers, enabling you to have an accurate status of your financial side of your business.

The advantages of international factoring are that your cash flow improves immediately, enabling you to pay off immediate expenses like staff salaries, bulk purchases, etc and also eliminates the need to maintain an international collection department. This facility also gives you a chance to expand your business by taking on more exports to different countries, where your factoring company has tie-ups. This facility is also convenient rather than taking a bank loan, which would normally require guarantors, collateral and intensive documentation. You would have to pay interest on that loan in any case. International factoring is more like an extension of your current business, as it takes care of your payment collection as well as provides you with ready cash.

You should note that these services of an international factoring company are slightly expensive, since two factoring companies are involved. There should also, not be any quality problems with regards the goods, which you have exported. You will also have to commit a minimum amount of business to your factoring company. Since your factoring company might take over your collections side and even take care of your bad debts, there could be some friction between you and your customers. Your factoring company might also ask for collateral from your customers as a guarantee against bad debt, which your customers might be averse to giving.

So, after studying the above points, you too can go in for international factoring of your invoices, to put your business on the fast track.



Thanks to Kris Koonar for contributing this article to our Factoring blog:

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