Accounts Receivable Factoring also known as factoring, is the sale of invoices at a discount. It is simply a method of financing that is used by businesses to raise capital quickly and improve cash flow without going into debt. What is so nice about receivable financing is that you do not have to wait long periods in order to get paid so that you can pay your suppliers and employees on time. Most businesses cannot afford to wait 30, 60, or 90 days to collect payment because this cash crunch prevents them from generating new sales.
When a business delivers goods and services to an Account Debtor (Customer) an invoice is created. The business can turn around and sell this Invoice at a discount to a Factoring Company. Normally invoices carry net 30 terms, but in reality customers pay in the net 45 – 60 range. If customers continue this practice of stretching your payment terms, it becomes very hard to cash flow and grow your business. Factoring allows you to take control of your business and not be at the mercy of your customers.
Instead of going through the long collection process a business can simply sell its invoice to a factoring company and receive funding withing 24hrs. The factoring company handles the collection and ensures the credit worthiness of the Debtors.
The first step in the funding process is building a schedule of invoices that require funding. The factoring company will verify the invoices and ensure the credit quality of the Debtor. Since the invoice is sold to the factoring company, the debtor is notified to send payment directly to the factoring company. Now the factoring company funds the schedule of invoice and advances between 70% – 90% of the invoice face value. The percentage advance is based on the average credit quality of the debtors. After funding we play the waiting game. After a period of time the debtors make payments to the factoring company. Once the factor collects the full invoice value the reserve less the factoring fee is returned to the business owner.
Factoring provides over 100 billion dollars to industry each year. Factoring is not a new form of financing, but rather an old financial service dating back thousands of years. Multi-billion dollar corporations rely on factoring right now to finance their growth. Banks traditionally service these large corporations but often leave smaller sized businesses out in the cold. Only over the last several years has this void has been filled by the factoring companies which make funding available to smaller sized businesses to which banks are reluctant to lend funds. The typical factoring company is more interested in the credit quality of the debtor, but the banks won’t even look at financing a company without at least two profitable years in business.
Financing your cash flow and growing your business is relatively easy with factoring. Most companies that get turned down for bank financing are refered to factoring companies. About 25% of our business actually comes from referrals the bank wouldn’t process.
Benefits of Factoring Receivables
Factoring is on the simplest financial services available to ease your cash flow burden. By expanding your cash flow, your business will become more nimble and able to take advantage of business opportunities. Not only will factoring improve your cash flow and help your credit rating, but it will also allow you to take advange of vendor discounts and allievate the hassels of collection. Because factoring relies on the strength and creditworthiness of your customers, factoring companies do not need to probe into your finances like a bank to approve your funding. The best part about factoring is that is is so simple and easy to apply.
Customized Factoring Program
* You decide the level of funding that you want.
* The advance rate is determined by the credit worthiness of the customers.
* Increase your credit line as your sales grow.
Factoring as a Negotiating Tool!
* If you’re trying to win business away from your competitors Factoring can give you that extra edge that you need to stay competitive in the marketplace. Imagine your prices are neck and neck with a competitor but you are able to offer more attractive payment terms. The odds are you would win the business in this situtation. This is a great negotiating tool.
* Instead of dealing with cost cutting, factoring enables you to turn the tables in negotiations whereby you negotiate over payment terms. You will be pleasantly surprised when you realize how much your customers value longer payment terms.
* Build the cost of factoring into your quotes. The customer won’t even realize he is paying for the factoring. This helps keep your margins intact.
Scenario: You offer your Customer NET 60 or NET 90 terms even and your competitor (who isn’t factoring) offers your customer NET 30, but has a 5% better price. Even if you factor this invoice with a 5% discount, you not only won the business, but you also did so without incurring any additional costs not to mention the positive effect on cash flow and margins.
Establish Credit with Suppliers
* By paying your suppliers on time, you become a good customer that may lead to more favorable prices and an extention of credit from the supplier.
* In some instances the cost of factoring your receivables is less than the volume discounts that you can obtain from your suppliers. Why not take advantage of supplier discounts if they are offered.
Stop Wasting time with Collections
* The Factoring company doubles as you Accounts Receivable and Collections department, which will save you valuable time and resources processing the invoices and collecting payments.
* The Factor company is your watchdog assuring you of a high credit quality customer base and eliminating the hassels of collection.
Leverage your Balance Sheet
* Since factoring is not a loan but rather a purchase of accounts receivables, it doesn’t count as debt against your balance sheet. This will still allow you to seek bank financing or leasing as an option in order to grow your business.