Factoring is a smart way to bring in cash flow to your businesses. It provides ready capital to meet the ongoing daily operational expenses. The procedure is relatively simple and quick hence, this type of funding is gaining popularity with business houses. However, while working out the solution to augment the cash crunch in your business through factoring, take into account some important pitfalls that you can avoid. There are certain downsides to factoring, which hamper your growth instead of developing your business. Therefore, read on to get a clear picture of the pros and cons of factoring.

The time factor while entering into a contract for factoring is very important. Factoring companies may need a long period of commitment from you to sell receivables to them. For instance, a factoring firm may compel you to sell the invoices to their firm for a period of six months. In such a case you are tied down to selling your receivables even if your cash need is short-termed. Also, it ties you to a particular firm, which may deter you from enlisting the services of other factoring firms that may offer some good schemes.

Factoring offers respite to the revenue requirements of the firm. But beware of the fact that businesses can get hooked on to the habit of factoring. With Factoring solutions the business gets converted to COD business in a very short time, so the ongoing liquidity can get addictive, even if its not needed by the company. Sometimes, this tendency to continuously factor the invoices or receivables can make the business house pay dearly. If, the business house has opted for recourse factoring and in case the receivable does not materialize or is not paid up, then the business house becomes liable to pay back the amount with interest to the factoring firm. Hence, even if the fee for factoring may be less, the total interest cost could be expensive.

While selecting a factoring firm, make sure that the factoring firm is pleasant to deal with, as it will affect your relationship with your customers. The factoring firm after buying the receivables assumes the responsibility of collection from your customers. They may require financial details of your customers, which could be met with resistance. Your customers may also not like to make payments to third parties; they may view it as a financial weakness from your side. This may have a negative impact on further orders from them.

The factoring firm may interfere with your business practices, which they feel may minimize risks in composition of your invoices, though this may not suit your requirements. In case, you want to apply for a bank loan, then the bank may also want to use your receivables as collateral. But if all your receivables have been factored, the bank will not be readily convinced to give you a business loan. This may even result in the bank disapproving your loan application altogether, as you no longer own the most liquid asset of your business.

Hence, it is recommended you clarify these issues before you opt for business factoring. Be aware of these pitfalls and watch out carefully for the fine prints on the factoring agreements and only then go in for this type of funding for your business.



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

Factoring Tips

If you run your own business that has a large number of credit clients, then you would have realized that it could be very difficult to meet your daily expenses without a steady inflow of cash. You might have wished time and again for a way, by which you could get cash against your credit invoices.

Business factoring is an excellent way to receive regular finance against your credit bills. The factoring company will purchase your credit invoices and provide you with instant cash within 2 days in the form of an electronic transfer into your bank account. The factoring company will charge a factoring fee of around 1.5% to 5% of the invoice value to you for their efforts. However, since your factoring company will need to provide you with immediate cash and might also handle your collection department, it is essential that you perform a thorough exercise of checking various factoring companies, before you decide on the one that suits you the most.

You can search for a good business factoring company by browsing through advertisements in various trade magazines related to your business or even over the Internet. Once you have short-listed a few that seem to show some potential, and then you should cross check their credentials by asking some of their clients about the caliber of services that have been provided by these companies. The factoring company should also have the required experience in dealing with companies that are similar in nature and size as compared to your business. They should be prompt in wiring the money into your account, since any delay on their part could put a question mark on the very reason for hiring a factoring company in the first place.

Since the factoring company could also take over the receivables of your business, you will need to make sure that the staff of the factoring company are not only efficient, but also courteous and possess the necessary tact to ensure that they recover the money on the due date without raising tempers. They will also need to effectively maintain their database, so that they do not end up harassing those clients that might already have cleared their dues.

The factoring company should not insist on any term contract and should be ready to part ways with a minimum period of notice, since this would enable you to extract yourself out of a sticky situation, in case you are unhappy with the services provided by your factoring company. The factoring company should also have staff that has specifically been assigned to handle your account. This will enable you to sort out any problems or get answers to any queries without having to explain the entire details of your account every time you call them up. The factoring company should quickly earn the respect of not only your own staff, but also of your clients. The factoring company should also have written guidelines on the exact percentages of their fees and penalties, so that there is no scope for any dispute at a later date.

Therefore, it is necessary that the right business factoring company passes all the above tests, before you finally decide on the one that matches your business profile. Since the chosen factoring company will be working closely along with your own company, it is essential that you team up with the best company that will enable both your businesses to smoothly cruise on the path to financial success.



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

Instant Working Capital

Can you answer John’s question about Factoring?:

I. TRUE /FALSE

1. A subsidiary ledger is a group of control accounts which provides information to the managers for controlling the operation of the company.

2. An accounts receivable subsidiary ledger has all the detailed information about the cash sales to individual customers.

3. The accounts payable subsidiary ledger provides detailed information about amounts owed to creditors.

4. Control accounts are always located in the general ledger.

5. Special journals are used to record unique transactions which do not occur very often.

6. A cash receipts journal can be used to record all transactions involving cash coming into the business, regardless of the source.

7. Using special journals can save time in posting because column totals are often posted rather than individual entries.

8. An accounting information system involves data collection, data processing, and information dissemination.

9. Only transactions that cannot be entered in a special journal are recorded in the general journal.

10. A highly automated computerized system of accounting eliminates the need for internal control.

11. Management is responsible for establishing a system of internal control.

12. The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

13. The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

14. Firms use physical, mechanical, and electronic controls primarily to safeguard its assets.

15. The petty cash fund eliminates the need for a bank checking account.

16. If a company deposits all its receipts in the bank and pays all its bills by check, then the monthly bank statement balance will always agree with the company’s record of its checking account balance.

17. All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

18. The custodian of the petty cash fund has the responsibility of recording a journal entry every time cash is used from the fund.

19. A debit memorandum will show the collection of a note receivable by the bank.

20. To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by an employee who has no other responsibilities pertaining to cash.

21. Both accounts receivable and notes receivable represent claims that are expected to be collected in cash.

22. If a company uses the allowance method to account for uncollectible accounts, the entry to write off an uncollectible account only involves balance sheet accounts.

23. Allowance for Doubtful Accounts is a contra asset account.

24. A note receivable is a written promise by the maker to the payee to pay a specified amount of money at a definite time.

25. The maturity date of a 1-month note receivable dated June 30 is July 30.

26. The two key parties to a note are the maker and the payee.

27. When the due date of a note is stated in months, the time factor in computing interest is the number of months divided by 360 days.

28. Both the gross amount of receivables and the allowance for doubtful accounts should be reported in the balance sheet.

29. The account Allowance for Doubtful Accounts is closed out at the end of the year.

Account Receivables Collection

Factoring companies: learn the top seven financial questions to ask and then choose the best one to grow your business the fastest.

A factoring company advances funds to your business based upon the dollar amount of your company’s outstanding account receivables. With a quality factoring firm, you no longer have to wait to receive money owed to you by clients. Each accounts receivable factoring firm may charge different fees, though. Here are the high level questions to ask each company to find the best situation for your firm:

Ask the following questions of your prospective factoring companies:

1. Ask each invoice factoring company how they determine fees to spot the best deal.

The fees that you would pay to accounts receivable factoring companies are based on the financial strength and credit worthiness of your customers. Specifics include:

* How often you bill your customers,

* how long your customers have been in business and

* how quickly your customers pay your invoices.

2. Ask invoice factoring companies for a favorable advance rate and quickly increase your working capital.

When working with a factoring firm, you will submit outstanding invoices to them. They will then provide your business with cash based upon your advance rate. Customary advance rates range from 75% to 90%, which means you would receive between $750 and $900 for each $1,000 of outstanding invoices submitted.

Learn more about how to choose the right factoring company and solve your cash flow management problems.

Now let’s get more detailed; here are a few more to ask to make sure you find the best factoring partner to grow your business.

Ask the following questions of your prospective factoring companies:

3. If an invoice factoring company offers you a flat fee rate, ask about the implications of a flat fee rates and make the right choice for your business.

While flat fees may seem less complicated, the end cost can be substantially higher. With a flat-rate fee, the cost is the same whether the receivable is out for 10 or 60 days so, unless most receivables are out 45-60 days, the overall cost makes this type of rate more expensive.

4. Ask an invoice factoring company these questions about contract terms to avoid costly termination fees:

* Is there a contract term,

* how long would my contract term last,

* is there an early termination fee,

* is my contract automatically renewed if I don’t cancel in writing and

* if so, how much advance notice to cancel do you require?

5. Not all receivables factoring companies are alike: ask potential partners if they work with all clients.

Some receivables factoring companies, for example, will not fund companies with a high concentration, i.e., if their business is dependent upon one or two clients. Other companies do consider clients with concentration and they usually examine risk levels to determine a rate.

Factoring companies: Now let’s get to the nuts and bolts with the final two questions to ask to get the best invoice factoring contract for your company.

Ask the following questions of your prospective factoring companies:

6. Make a savvy financial decision: ask about specific fees charged by receivables factoring companies.

Ask prospective factoring firms about the cost of the:

* Application fee,

* Due diligence fees,

* Credit reporting fees,

* Background or lien search fees,

* Factoring company lock box fees,

* Minimum monthly volume fees,

* Charges to add a new receivables factoring client,

* Early termination fees from receivables factoring contract,

* Upfront advance fee and then an interest fee,

* Fee for same day advances,

* Monitoring fees,

* Automated clearing house (ACH) fees and

* Wiring fees.

Some invoice factoring firms have a flat rate fee that includes all services, except for the monthly Internet access report fee.

7. Ask how factoring companies calculate interest charges and choose the most favorable.

Some factoring firms begin charging interest as soon as an invoice is issued. Under this system, you could end up paying several more days worth of interest than if your factoring company began charging interest on the date you receive funds. Also ask factoring companies if you can select what day of the week to receive your funds and pick what’s best for your company.

Select a quality invoice factoring company now: get immediate funding to grow your business.

Now that you have the tools and knowledge to evaluate factoring companies, you can decide which factoring company will grow your business the fastest. Don’t miss out on lucrative business opportunities because of poor cash flow any longer! Contact companies and get your factoring loans to get growing now.



Thanks to Gage Price for contributing this article to our Factoring blog:

Invoice Discounting

Can you answer Nirvana’s question about Factoring?:

Do we need to take into consideration the working capital required for the project and the bank finance for that, while calculating the Project IRR?

Please give an example.

Commercial Finance Factoring