e most misunderstood financial tools available to small businesses today, in the United States alone, factoring dates back to colonial times. Historically factoring has been around for more than 4000 years, or since the beginning of trade and commerce. In the U.S. a popular method of financing, factoring is helping many businesses improve their cash flow. Simply put, factoring is when a company decides to discount its accounts receivables, at which time the factor bears the credit risk for the accounts. Itis the factor who is the recipient of payment from the client’s customer. Invoice factoring is among one of the most efficient forms of financing today — particularly now that we are faciong such tough economic times. Factoring has been traced back to a king in Mesopotamian named Hammurabi. Historical documentation about the use of factoring proves that it took place in our American colonies before the American Revolution. This was at a time when raw materials like furs, cotton, timber and tobacco were shipped to Europe. Merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials. this way the colonists were able to continue to harvest their new land, free from the burden of waiting to be paid later by their European customers. This practice of receivables factoring was very helpful to the colonists, as they could go ahead and begin their harvesting without waiting for the money the Europeans owed them. In the past, factoring agreements were on an all or nothing basis where one either factored all of a company’s invoices or not. But in recent years, single invoice factoring, also known as spot factoring, has become popular. With single invoice factoring, you are allowed to factor as few or as many invoices as you desire. Perhaps you own a small business and things are going really well, but you wish you could get some additional working capital to move your business to the next level. Whether it’s a one-time need, or an ongoing necessity, working capital or the lack of it, is the most obvious reason between the success and failure of a small business today. Factoring just might be the ticket for you and your company? Ask yourself if your small business could use factoring to speed up cash flow. If you need to increase working capital so the business can grow, then chances are you could use factoring. While often confused with accounts receivable factoring, which is another way of saying invoice factoring, accounts receivable financing technically refers to a loan agreement between two parties. Factoring is a financial purchase or transaction and involves three parties. The biggest difference is that with a loan it’s your credit that matters, with a factoring agreement it’s your customers credit worthiness that matters. You may hear things like accounts receivable factoring with and without recourse. What does this really mean? The term “spot factoring” is the same thing as single invoice factoring and it is becoming more common in its usage. Single invoice factoring, or spot factoring, refers to the increasingly popular practice of picking your spots, or choosing which invoices you want to factor. This allows you to retain the most money while spending the minimum fees with the factoring company.

Thanks to Kristin Gabriel for contributing this article to our Factoring blog:

Invoice Discounting

If you are running a small to medium freight company, then you must be losing sleep, worrying about getting cash on time to meet your expenses and getting your payments from customers on time. This is where freight factoring can help your business go from slow to quick growth.

When you haul freight for your customer or freight broker, you would be issuing a freight invoice. You would then wait for 30 to 90 days depending on the credit given to your customer, for your payment to arrive. Freight factoring companies will “buy” this freight invoice off you and give you the invoice amount immediately. This payment will be in 2 installments. The first installment will be transferred to your account in 2 to 4 days and could be upto 90% of the invoice value. The 2nd installment will be the balance amount and will be transferred to your account after your customer makes the payment on the due date, minus the ‘factoring fees’.

This means that you get your money almost immediately after making the invoice and this ensures that you can meet your expenses with ready cash. This will enable you to pay off your fuel bills and salaries on time and also enable you to take on new and bigger hauls, thereby increasing your business. This will mean increased credit freight invoices and consequently more business for your freight factoring company, and again more cash payments for you. A winning combination indeed, but you should be careful about some points, while hiring the services of a freight factoring company.

The ‘factoring fees’ could be from 1.5% to 5% of the total invoice amount, depending upon various factors such as the credit period of the invoice, the credit rating of your customer as decided by the factoring company and the total volume of business, you give to the factoring company. So, if you are giving more than 30 days credit to a customer, who is rated low on the factoring company’s credit rating list, then the fees will be the highest.

That could reduce your profit margin substantially. The freight factoring company should also be able to handle your account efficiently and since they could also be taking over your payment collection from you, they would have to behave courteously with your customers or they could end up damaging your reputation and relation with your customer. Your customers will also have to be informed about your tie-up with the freight factoring company and some of them might not be very comfortable in dealing with third parties.

These problems could crop up, once you hire the freight factoring company. But, if you keep an eagle eye on their operations, you could quickly diffuse any tricky situation without ruffling too many feathers. Some factoring companies also offer ‘non-recourse’ factoring, whereby any customer defaulting on his payment will be the factoring company’s problem and not yours. This will help you in concentrating more on increasing your hauling business, rather than losing sleep over bad debts. However, any additional service including this one from the factoring company will cost you more. You will have to decide finally, on which services you would require from them and which you don’t.

So, freight factoring can be a boon for your budding freight business, but you should also understand the risks and charges associated with it.



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

Instant Working Capital

If your business is need of some quick funding, and you extend credit to or invoice your clients for services rendered or products delivered, then you should consider business factoring.

Factoring, also known as invoice factoring, is a funding option that can quickly provide businesses with money needed for reasons such as meeting payroll, purchasing inventory, or a quick boost in working capital in order to have some extra cash on hand.

Factoring is a great way for small or large businesses to get fast funding. The process of factoring is relatively easy and straightforward. You start by compiling invoices that you want funded, and submitting them to a factoring business. Once the factor receives your invoices, you clients will be checked for credit worthiness and payment history. Your invoices will then be looked over to make sure that they have been completed correctly. Once everything checks out, a notice will be sent to your clients directing them to pay the remainder of their balance to the factor rather than your business.

It usually takes two to five days to receive your initial payment from a factor, which will be anywhere from 70% to 90% of your accounts receivable. If you use an online service, you may be able to receive your money in as little 24 hours. Factors will either deposit the money directly into your bank account, or, they will cut you a paper check.

Once a factoring company has collected from all of your clients, you will receive the remainder of your advance, minus the fee (also known as a discount rate) that the factor charges for their service, which will usually be 3% to 5%, depending on the factor. There are several different aspects of accounts receivable loans that can affect your discount rate, which include the type of business you have, your clients, the number of invoices you submit, you type of billing, and the type of factoring service you wish to have.

It is highly likely that you will have to sign a contract with your factor detailing service fees, payment timelines, and what will be held as collateral. It may be a good idea to have a lawyer look over this contract, especially if you are unfamiliar with factoring, or are unsure of the terms that have been outlined.

When choosing factoring as a business financing option, it may also be helpful to consider speaking with several factors in order to get factoring price quotes . And, remember that the factor will be representing your company, so you will want to choose a factor that can uphold that values of your company and provide good customer service.



Thanks to Lexie Wright for contributing this article to our Factoring blog:

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