Factoring Company Guide
Step One: Application
The process starts with you filling out a straightforward form we'll provide. It asks for basic details such as your company's name, address, the kind of business you do, and some info about your customers.
There might be a need for you to share some documents like an aging report of accounts receivable or credit limits of your customers. The factoring company is interested in assessing your customers' ability to pay, and this isn't based solely on their past dealings with your business. We're looking for a comprehensive understanding of their financial health.
In the beginning, you'll also talk about financial specifics with the factoring company. You'll discuss how many invoices you plan to factor each month (meaning how much cash you want readily available), the rates of advance and discount, and the speed of issuing the advance by the factoring company.
Typically, these elements might differ based on your customers' financial stability and your estimated monthly sales volume for factoring. Other variables could be your industry, business longevity, and perceived risk associated with your customers. For instance, dealing with many high-risk customers could mean higher factoring fees compared to having a few slow-paying government agencies as customers.
In factoring, the total dollar amount you factor is crucial. More the volume (the total dollar amount of the invoices you factor), better the rates you get.
The factoring company will examine the application you submit to decide if factoring suits your business. They will assess the potential risks and rewards using the details you've provided.
Upon approval, negotiations for terms and conditions can be expected. The negotiation takes into account several aspects of the deal. For example, a $10,000 factoring deal won't have as favorable conditions as a $500,000 one.
During the negotiation, you'll understand the cost of factoring your accounts receivable. Once an agreement is reached, the factoring company begins the funding process. They'll check your customers' credit, look for any liens against your company, and confirm the authenticity of your invoice. Only after these checks, they buy your receivables and give you the cash advance.
Factoring Company Benefits
Factoring Benefits: Enhance Your Business Operations
- Alleviate cash flow concerns and shift your focus to business growth.
- Avoid the stress of loan repayments with quick cash access in 2-4 days.
- Maintain complete control over your business decisions.
- Significantly reduce or eliminate costs associated with collecting payments.
- Optimize your cash flow by selectively factoring invoices.
- Stay financially ahead of slow-paying clients.
- Boost your business’s production and sales capabilities.
- Utilize expert services for efficient payment collection and credit assessment.
- Consistently meet your payroll obligations.
- Always have sufficient funds for payroll taxes.
- Benefit from discounts on bulk material purchases.
- Enhance your purchasing power for additional savings and discounts.
- Improve your credit rating by maintaining adequate cash flow.
- Ensure available capital for business expansion.
- Secure necessary funding for your marketing efforts.
- See tangible improvements in your financial statements.
- Receive detailed reports on your accounts receivable for informed decision-making.
Is Factoring For You
Recognizing the Importance of Factoring
"When you don't collect the money, a sale remains unfinished."
Have you ever felt like you're taking on the role of a part-time banker for your customers?
Take a moment to examine your accounts receivable aging schedule and count how many accounts are overdue by more than 30 days. Congratulations, you're essentially providing credit to those customers. By not receiving timely payment for your products or services, you're essentially offering interest-free financing to your customers. This may not align with your original business intentions, does it?
Let's consider this:
If your customers were to approach a bank and borrow the same amount of money, they would undoubtedly expect to pay a significant amount of interest for that privilege.
Moreover:
Not only are you missing out on earning any interest on that money, but more importantly, you're also losing the opportunity to utilize that capital while waiting for your customers to settle their debts. What is the cost of not having this money readily available? Essentially, your customers are essentially requesting you to finance their business by granting them extended payment terms, often exceeding 30 days.
However, have you ever taken a moment to contemplate the expenses incurred due to "missed opportunities" when your funds are tied up in accounts receivable? It's worth reflecting on the impact this has on your business and exploring how factoring can help alleviate these challenges.
Factoring History
Factoring: Empowering Businesses for Success
Welcome to the world of factoring, where businesses find the financial support they need to thrive. Whether you're a business owner, an aspiring entrepreneur, or seeking innovative financial solutions for your employer, factoring can play a crucial role in helping you achieve your financial goals.
It's interesting to note that factoring has often been overlooked and remains relatively unknown in the business world. Despite this, it serves as the backbone for many successful American businesses, unlocking billions of dollars each year and enabling thousands of enterprises to grow and prosper.
So, what exactly is factoring? Simply put, it involves purchasing commercial accounts receivable (invoices) from businesses at a discounted rate. In today's competitive landscape, offering credit terms to customers is often necessary to secure business. However, this can create cash flow challenges, particularly for new or struggling companies that rely on steady and timely payments.
Factoring, with its long and rich history, traces back 4,000 years to the time of Hammurabi, the king of Mesopotamia, often considered the birthplace of civilization. Mesopotamians were pioneers in developing writing, establishing business codes, and introducing the concept of factoring.
Over time, factoring gained traction in various civilizations. The Romans, for instance, were early adopters, introducing the sale of promissory notes at discounted rates. In the American colonies, factoring played a crucial role before the revolution. Merchant bankers in London and Europe provided funds in advance for goods such as cotton, furs, and timber, allowing colonists to continue their operations without being hindered by delayed payments from European customers.
It's important to highlight that these historical arrangements differ from modern banking relationships. In fact, modern banks would have caused delays, waiting to collect payments from European buyers before disbursing funds to the colonists. This impractical process led to the emergence of factors in colonial times who provided advances against accounts receivable, enabling clients to maintain their operations while awaiting payment.
As the Industrial Revolution unfolded, factoring adapted to address credit concerns while maintaining its core principles. Factors began assisting clients in assessing customer creditworthiness, establishing credit limits, and guaranteeing payment for approved customers. Today, this approach, known as non-recourse factoring, is commonly practiced in the business world.
Before the 1930s, factoring primarily served the textile and garment industries, which inherited the practice from the colonial economy. However, after the war years, factors recognized the potential to expand factoring to other industries reliant on invoicing, leading to its broader adoption.
In the present day, factors come in various shapes and sizes. Some operate as divisions within large financial institutions, while many others are independently owned entrepreneurial endeavors. The popularity of privately owned factors surged in the 1960s and 1970s when high-interest rates made traditional bank financing less accessible. This trend continued in the 1980s, driven by increasing interest rates and changes in the banking industry. As banks became more expensive and inflexible due to regulatory constraints, small business owners sought alternative financing options. Factoring emerged as an increasingly popular choice.
Each year, thousands of businesses leverage factoring to sell billions of dollars in accounts receivable. By doing so, they unlock cash flow, achieve profitability, drive growth, and, in some cases, secure their very survival. Factoring empowers businesses by providing them with the financial support they need to thrive in today's competitive market.
Credit Risk
Quick Cash Advantage: Unlock Expert Credit Risk Assessment at No Extra Cost!
Precisely evaluating credit risk is a vital aspect of our factoring business. Very few, if any, clients can perform this task as objectively as we can.
At no additional fee, we serve as your dedicated credit department for both new and existing customers. This gives you a significant advantage over managing these functions internally.
Imagine a scenario where a salesperson is pursuing a new account with the potential for substantial purchases. Their focus on winning the business may cause them to overlook warning signs related to credit difficulties. They might even bypass your internal credit checks to expedite the process. While this could secure the sale, it won't guarantee payment, and without payment, there is no sale.
Rest assured, this won't happen with us. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We won't purchase the invoices of customers with poor credit ratings, minimizing the risk of nonpayment. However, please don't consider our involvement as a tightening of credit to the extent that it negatively impacts your business beyond your control.
The ultimate decision to do business with a new customer of questionable creditworthiness remains yours. (Nevertheless, we reserve the right to say, ""I told you so!"")
While we may not purchase those invoices, you still retain the freedom to extend credit terms as you see fit. You remain in control. Regardless of the decisions you make, our participation ensures that you have access to more comprehensive, objective, and high-quality information for informed credit decisions compared to your past practices.
We thoroughly research new clients and, equally importantly, regularly monitor the credit ratings of your existing customers. This contrasts with the rare routine credit updates on the established customer base in many businesses. Neglecting this can be a grave mistake.
Typically, businesses only conduct a credit check when it's too late, and the problem has already spiraled out of control. On the other hand, we promptly inform you of any changes in the credit status of your existing customers.
In addition to providing specific customer credit information, you'll also enjoy the benefits of comprehensive, detailed reports on your accounts receivables as a whole. As part of our process, you'll receive accounting details, transactional insights, aging reports, and financial management reports. This data empowers you to incorporate it into your sales tracking, account history, and in-depth analysis.
With over 70 years of successful experience in cash flow and credit management, we are eager to leverage our expertise for your benefit. Let us apply our knowledge to help you achieve your financial goals and unlock the full potential of your business.
How To Change Factoring Companies
Changing Your Invoice Finance Provider
Considering a change in your invoice finance provider? This guide offers practical advice for those dissatisfied or looking for better options. We provide clear insights into understanding UCCs, the steps for transitioning, and essential questions to ask before committing to a new financial partner.
Uniform Commercial Code (UCC) Explained
Invoice finance companies use UCC filings to secure their interests. Key functions of the UCC include:
- Asset rights tracking.
- Notifying other lenders of existing agreements.
- Securing first rights to your invoices, akin to a mortgage or vehicle title.
Transitioning Between Providers
The process of switching providers involves a "buyout." Your new provider will settle balances with the old one, similar to mortgage refinancing. This step is detailed in a Buyout Agreement, signed by all involved parties.
Calculating the Buyout Amount
The buyout sum typically includes unpaid invoices minus reserves and additional fees. It's crucial to request a comprehensive breakdown to understand all charges, including potential early termination fees.
Cost Implications of a Buyout
Transitioning can be financially neutral if you offer new invoices to the new provider. Be cautious of double fees when resubmitting previously financed invoices. Timely communication with your old provider is vital to avoid extra charges.
Time Considerations
Switching may extend processing times due to buyout calculations. The buyout amount can fluctuate with accruing fees and ongoing payments. An experienced company can streamline this process.
Complex Scenarios
In some cases, both old and new financiers may share rights to your invoices until the balance is settled. However, this scenario is not typical.
Questions to Ponder Before Committing
- Is it possible to work with multiple invoice finance companies at the same time?
- What are the notice periods and penalties for changing providers?
- What is the payment processing timeline with the new provider?
- Who will be your primary contacts at the finance company?
- Are there any postage costs for mailing invoices?
- Are there extra fees for credit checks or setting up new customers?
- When does the provider start holding reserves?
