In the world of finance, factoring is a transaction in which a business sells its account receivables to a third party--called a "factor"--in return for immediate cash, generally working capital to expand the business. The accounts receivables are sold at a discount. Although commonly called a loan, factoring isn't a loan at all; it's the purchase of an asset. Factoring has been used by businesses for more than four centuries.
Relief from responsibility for collection of no-pay and slow-pay clients
Fill more orders
Flexible funding program that increases as you increase your sales
Ability to take advantage of vendor discounts
To have funds for payroll and taxes
Extend credit to customers on large orders
Buy equipment or inventory on demand
Why Do Businesses Engage in Factoring?
Businesses engage in factoring because it's a simple way to get money without having to prove credit worthiness, which in tough economic times can be difficult. Factoring is easier and faster than getting a bank loan, with no requirements for a bank statement or a business plan. Factoring also lets business owners dispense with accounts receivables, which have long been among the biggest sources of frustration to many business executives. They sell someone a product or service but have to wait weeks or even months to get paid. And there's always the risk that the account won't pay.
A factor provides immediate cash. You take your receivables to the factor and get an advance payment of between 70 percent and 90 percent of the total. After charging a small fee--generally 2 percent or 3 percent--the factor releases the rest of the funds once the receivables have been fully paid. This helps a business with its cash flow and allows it to continue to make investments in its operations and, hopefully, grow.
As a general rule, the discount rate--the fee the business pays the factor--is in proportion to the age of the receivable. The lower the age, the lower the fee. Most factors won't accept accounts receivables older than 90 days.
Q: What is factoring? How does it work?
A: Factoring is the purchase of accounts receivable for immediate cash. Once you have delivered a product or performed a service for a creditworthy corporation or institution, make contact with Factor prior to sending your invoice to your customer. Underwriters will confirm with your customer that the work has been completed or the goods delivered and accepted, you can be advanced up to 70% - 90% (up to 60% for the construction industry) of the face value of the invoice amount in cash. When your customer pays, you will receive the balance less the discount.
Q: Do I need accounts receivable financing?
A: Yes...if you are a new business. YES...if you are a business that can't get traditional financing, such as a small or medium size business or a minority or woman owned business. YES...if you need additional operating capital. YES...if you want to solve your cash flow problems.
Q: How do I qualify?
A: A credit decision is based on the strength of your customers, not you. It's easy to qualify if you meet the following criteria: Your customer must be another (creditworthy) business. Your invoice must be a valid one for goods sold and delivered or services rendered...to your customer's satisfaction. Each invoice will be verified with your customer.
Q: What does it cost?
A: The discount fee ranges from 3 - 5% and is determined by the number of days that elapse from the day funds are advanced to you until the day invoice is paid back by your customer. And, the fee is earned only after the payment has been collected on an invoice..not before.
Q: How will I know which invoices are paid and which are not?
A: You will have your own account executive to work with, whom you can call at any time for updated information. Just request an "Aging Schedule" which will show you which invoices have been paid and which remain open.
Q: How fast can I get money?
A: In many states it takes as little as one week (or less) to get on-line. Once on-line, the you can be funded on your invoices within 24 hours (once in receipt of verification of your invoices).