A Quick Guide To Business Factoring
June 1, 2009 by Accounts Receivable Factoring
Filed under About Factoring
When businesses need cash in a speedy manner, they look to a factoring company to receive funds from their unpaid and open invoices. The factoring company, or factor, will review your accounts receivable and upon approval, will advance you a certain percentage of the overall value of your submitted invoices. Business factoring is a great tool because your personal and business credit history is not considered during the process. Product and service-based businesses will greatly benefit from business factoring. Qualifications for factoring services include your monthly invoices and the credit worthiness of those that owe you.
To start the process, gather and make copies of the outstanding invoices you want funded and make sure all of the required information is filled out. The factor will perform a variety of checks on your clients to make sure they will be able to fulfill their invoice. This information will also help the factor to determine how much you can receive and the discount rate they will charge. After the information has been verified, the factor will send out a notice of assignment, which informs your clients that their invoices should be paid to the factor and not your business. You can expect to receive your funds in two to five days, or even 24 hours if the factor allows for online invoicing. Your initial payment will range from 70 to 90 percent of the total value of your submitted invoices and you will receive the remainder once the factor has collected the rest from your clients.
There are many different elements that make up the costs of business factoring. Expect to pay one to five percent of the accounts receivable total value as the discount rate. Extra costs include what type of factoring and billing you choose, the reliability of your clients ability to pay, the type of industry you work in, set up costs and how many invoices you submit.
The benefits of factoring include the opportunity for financial advances, quick access to funds, the opening for more funding and the chance to focus on your business while the factor works on your collections. On the other side, disadvantages include paying a higher discount rate if your clients deem themselves as slow paying or have poor credit. If your client fails to pay their balance, this can also increase the total costs of the factoring services. Properly assess your clients’ ability to pay before you start the factoring process.
You will have the option of choosing between recourse and non-recourse factoring.
Recourse factoring is more affordable, but if a client defaults on a payment, you will be held accountable. Non-recourse is more costly, but the factor will hold all responsibility if your client cannot fulfill their payments.
Once you decide on which type of options you will opt for, there are few key items that will help lead you to the right vendor. Compare vendors and their customer support during the process, experience in the field, professionalism with your clients, references and how long the company has been in business before you sign the contract. Also keep in mind that you can negotiate for more money up front and submit fewer invoices of higher amounts to keep your total costs low.
Thanks to Merrin Muxlow for contributing this article to our Factoring blog:
To start the process, gather and make copies of the outstanding invoices you want funded and make sure all of the required information is filled out. The factor will perform a variety of checks on your clients to make sure they will be able to fulfill their invoice. This information will also help the factor to determine how much you can receive and the discount rate they will charge. After the information has been verified, the factor will send out a notice of assignment, which informs your clients that their invoices should be paid to the factor and not your business. You can expect to receive your funds in two to five days, or even 24 hours if the factor allows for online invoicing. Your initial payment will range from 70 to 90 percent of the total value of your submitted invoices and you will receive the remainder once the factor has collected the rest from your clients.
There are many different elements that make up the costs of business factoring. Expect to pay one to five percent of the accounts receivable total value as the discount rate. Extra costs include what type of factoring and billing you choose, the reliability of your clients ability to pay, the type of industry you work in, set up costs and how many invoices you submit.
The benefits of factoring include the opportunity for financial advances, quick access to funds, the opening for more funding and the chance to focus on your business while the factor works on your collections. On the other side, disadvantages include paying a higher discount rate if your clients deem themselves as slow paying or have poor credit. If your client fails to pay their balance, this can also increase the total costs of the factoring services. Properly assess your clients’ ability to pay before you start the factoring process.
You will have the option of choosing between recourse and non-recourse factoring.
Recourse factoring is more affordable, but if a client defaults on a payment, you will be held accountable. Non-recourse is more costly, but the factor will hold all responsibility if your client cannot fulfill their payments.
Once you decide on which type of options you will opt for, there are few key items that will help lead you to the right vendor. Compare vendors and their customer support during the process, experience in the field, professionalism with your clients, references and how long the company has been in business before you sign the contract. Also keep in mind that you can negotiate for more money up front and submit fewer invoices of higher amounts to keep your total costs low.
Thanks to Merrin Muxlow for contributing this article to our Factoring blog:
Invoice Factoring - a Under Utilized Business Credit Facility not Commonly Known
February 10, 2009 by Accounts Receivable Factoring
Filed under About Factoring
The process typically works like this: Your company delivers a product or service and issues an invoice to your customer. If you offer terms to your customers, without factoring, you would wait 30, 60, or 90+ days for payment.
With factoring, the factor immediately purchases the invoice and advances an initial payment of 70-95 percent of the invoiced amount. In most cases, the business owner will have funds advanced within 24 hours.
When your customer pays the invoice (payment is made directly to the factor), you’ll receive the remaining balance (5 to 30 percent of the invoice amount) less the factor’s fee.
Factoring is a well-established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer.
In its basic form, factoring has been used by American business since Colonial times, and its origins go back even further, literally thousands of years to the early days of commerce.
Perhaps the most attractive aspect of contemporary factoring is a continuous level of cash flow into the bank account of the business, allowing for business planning and operation in a timely and efficient manner.
The factoring system also means available financing which automatically adjusts to sales departments sales activity and the company’s unique rate of business growth, because increased cash is triggered by new invoices. Factoring is the only finance mechanism directly linked to a company’s sales results. The greater the sales revenue, the larger the amount of invoices that can be factored.
The greater the sales activity (invoices), the larger the advance on those invoices. As such, companies that are in a growth mode will benefit greatly from invoice factoring as it allows the company to unlock revenues that are tied up in receivables.
Factoring is used more than all other types of business financing combined. Many of America’s major companies are enthusiastic users of this finance system and have been for years.
But factoring is not an exclusive prerogative of commercial and industrial giants. In fact, factoring comes a lot closer to you personally than just through big-name business whose products you know and use.
American consumers take part in a common form of factoring every time they use a credit card. There are 1.15 billion credit cards in circulation, 10 each for every American cardholder. In 1970 the average balance on individual cards was $649, increasing in 1986 to $1,472, and today it is over $4,800. Yes, there is a form of credit card receivables financing that is based on the projected future credit card sales revenue generated in the company.
Millions of times a day every business that offers customers charge privileges using credit cards is the direct beneficiary of factoring. American retail business depends on the factoring system, and without it the national economy would be seriously handicapped.
In this familiar transaction, the issuing bank or card company is the factor-using the Visa, MasterCard or other system-advancing the seller of merchandise or service cash immediately after your purchase, long before you actually pay. Because the seller gets cash up front without having to wait for your payment, his money is not tied up in receivables.
For the double privilege of making credit available to customers and getting immediate payment, the business is willing to pay a discount to the issuing bank or credit card company-typically two to four percent of the purchase price. Thus for ever $100 of merchandise you buy with a credit card, the seller gets $96 or $98 in immediate cash.
Factoring accomplishes the same for commercial-or business to business-transactions. When you extend credit to a customer, you are essentially becoming that customer’s part-time banker. For the period credit is extended to Customer Smith-30 or 60 days-you become his lender, and he your borrower.
For the length of time credit is extended you lose the value of that tied-up money because you can only anticipate payment. If Mr. Smith had paid cash, you could have invested that money immediately, earning interest on it rather than having to wait. When Smith pays late, your cost increases still further.
Since there is no “free lunch” in business, someone has to pay the costs of your extension of credit; either you pay by reduced profits, or your other customers are forced to pay higher prices. In a marginal company, excessive credit extension and late customer receivables can spell disaster.
Invoice factoring is off-balance-sheet financing so it does not add burden to the financials of the company. The decision to factor is not based on the personal credit of the owners of the business. Instead, the factoring decision is based on the credit worthiness of that businesses client base. This is particularly important to start-up companies that have been in business less than two years… and considered nonbankable by most banking instituions.
Small to medium size business owners who are experiencing cashflow problems would do well to consider invoice factoring as a means to accelerate cashflow and unlock cash that is tied up in receivables.
Thanks to Robert Jacobs for contributing this article to our Factoring blog:
With factoring, the factor immediately purchases the invoice and advances an initial payment of 70-95 percent of the invoiced amount. In most cases, the business owner will have funds advanced within 24 hours.
When your customer pays the invoice (payment is made directly to the factor), you’ll receive the remaining balance (5 to 30 percent of the invoice amount) less the factor’s fee.
Factoring is a well-established form of business financing that produces immediate cash payments to a company at the time of shipment, delivery and invoicing a customer.
In its basic form, factoring has been used by American business since Colonial times, and its origins go back even further, literally thousands of years to the early days of commerce.
Perhaps the most attractive aspect of contemporary factoring is a continuous level of cash flow into the bank account of the business, allowing for business planning and operation in a timely and efficient manner.
The factoring system also means available financing which automatically adjusts to sales departments sales activity and the company’s unique rate of business growth, because increased cash is triggered by new invoices. Factoring is the only finance mechanism directly linked to a company’s sales results. The greater the sales revenue, the larger the amount of invoices that can be factored.
The greater the sales activity (invoices), the larger the advance on those invoices. As such, companies that are in a growth mode will benefit greatly from invoice factoring as it allows the company to unlock revenues that are tied up in receivables.
Factoring is used more than all other types of business financing combined. Many of America’s major companies are enthusiastic users of this finance system and have been for years.
But factoring is not an exclusive prerogative of commercial and industrial giants. In fact, factoring comes a lot closer to you personally than just through big-name business whose products you know and use.
American consumers take part in a common form of factoring every time they use a credit card. There are 1.15 billion credit cards in circulation, 10 each for every American cardholder. In 1970 the average balance on individual cards was $649, increasing in 1986 to $1,472, and today it is over $4,800. Yes, there is a form of credit card receivables financing that is based on the projected future credit card sales revenue generated in the company.
Millions of times a day every business that offers customers charge privileges using credit cards is the direct beneficiary of factoring. American retail business depends on the factoring system, and without it the national economy would be seriously handicapped.
In this familiar transaction, the issuing bank or card company is the factor-using the Visa, MasterCard or other system-advancing the seller of merchandise or service cash immediately after your purchase, long before you actually pay. Because the seller gets cash up front without having to wait for your payment, his money is not tied up in receivables.
For the double privilege of making credit available to customers and getting immediate payment, the business is willing to pay a discount to the issuing bank or credit card company-typically two to four percent of the purchase price. Thus for ever $100 of merchandise you buy with a credit card, the seller gets $96 or $98 in immediate cash.
Factoring accomplishes the same for commercial-or business to business-transactions. When you extend credit to a customer, you are essentially becoming that customer’s part-time banker. For the period credit is extended to Customer Smith-30 or 60 days-you become his lender, and he your borrower.
For the length of time credit is extended you lose the value of that tied-up money because you can only anticipate payment. If Mr. Smith had paid cash, you could have invested that money immediately, earning interest on it rather than having to wait. When Smith pays late, your cost increases still further.
Since there is no “free lunch” in business, someone has to pay the costs of your extension of credit; either you pay by reduced profits, or your other customers are forced to pay higher prices. In a marginal company, excessive credit extension and late customer receivables can spell disaster.
Invoice factoring is off-balance-sheet financing so it does not add burden to the financials of the company. The decision to factor is not based on the personal credit of the owners of the business. Instead, the factoring decision is based on the credit worthiness of that businesses client base. This is particularly important to start-up companies that have been in business less than two years… and considered nonbankable by most banking instituions.
Small to medium size business owners who are experiencing cashflow problems would do well to consider invoice factoring as a means to accelerate cashflow and unlock cash that is tied up in receivables.
Thanks to Robert Jacobs for contributing this article to our Factoring blog:
