Factoring Company Guide
Starting Point: The Client Application
First, you'll fill out a basic client profile form we'll give you. This will ask for straightforward information such as your company's name, location, business type, and some details about your clients.
Additionally, you might have to provide documents like an accounts receivable aging report or details on your clients' credit limits. Keep in mind, we (the factor) are trying to determine how creditworthy your clients are, not just based on their history with you but their overall credit status.
At this stage, we'll also talk about some financial arrangements. Questions like, how many invoices do you want to factor each month (or how much cash you need immediately)? What will be the advance rate and the discount rate? And, how soon can we give you the advance?
Typically, the answers to these questions depend on the financial health of your clients and the expected monthly sales to be factored. Other aspects like your industry, the duration of your business, and the risk profile of your clients also play a part. For example, a long list of high-risk clients would mean higher factoring fees than a list of slow-paying government agencies.
In the factoring world, volume is key. The more invoices you factor (the higher your volume), the better rates you will get.
We'll use the client profile you provide to see if your business fits well with factoring. Basically, we're assessing the risks and rewards based on the information you've shared.
Once we approve, you'll then negotiate terms and conditions. This process considers various aspects of the deal. For example, factoring $10,000 won't get you as good a deal as a company factoring $500,000.
During negotiations, you'll fully understand the cost of factoring your accounts receivable. Once an agreement is reached, the funding process starts. We'll conduct due diligence by researching your clients' credit and any liens against your company. We also make sure your invoice is genuine before purchasing your receivables and advancing cash to you.
Factoring Company Benefits
Factoring Benefits: Your Business Lifeline
- Kiss goodbye to cash flow headaches and say hello to business growth.
- Forget about loan repayments. Cash in your pocket in just 2-4 days!
- You're the boss – keep full control over your business.
- Sayonara to the hassle and cost of chasing payments.
- Play the cash flow game your way by picking which invoices to sell.
- Beat those slow-paying clients at their own game.
- Supercharge your production and sales – cash flow won't be holding you back!
- Let the pros handle payment collection and credit checking.
- Always meet your payroll – no more sleepless nights.
- Payroll taxes? You've got them covered, every time.
- Snag those bulk-buy discounts you've been eyeing.
- Boost your bargaining power for even more discounts.
- Improve your credit score by always having cash for bills.
- Expand your empire with ample cash in hand.
- Market your business like a pro with a healthy cash flow.
- Watch your financial statements go from meh to marvelous.
- Dive into detailed reports on your accounts receivable.
Is Factoring For You
The Significance of Factoring for Small Businesses
"When you don't collect payment, a sale remains unfinished."
Do you often find yourself acting as a part-time banker for your customers?
Take a moment to assess your accounts receivable aging schedule and count the number of accounts that are overdue by more than 30 days. Congratulations, you are effectively extending credit to those customers. By not receiving timely payment for your products or services, you're essentially providing interest-free financing to your customers. This may not align with your original business intentions, does it?
Consider this:
If your customers were to borrow the same amount of money from a bank, they would undoubtedly be expected to pay a significant amount of interest for that privilege.
Moreover:
Not only are you not earning any interest on that money, but more importantly, you're also missing out on 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 asking you to fund their business by granting them extended payment terms, often exceeding 30 days.
However, have you considered the expenses incurred due to "missed opportunities" when your funds are tied up in accounts receivable?
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 Continuous Cash: Access Expert Credit Risk Assessment at No Extra Cost!
Accurately evaluating credit risk is a vital part of our factoring business, and few clients can match our objectivity in performing this function.
As part of our service, we act as your dedicated credit department for both new and existing customers, providing you with a significant advantage over handling these functions internally.
Imagine a scenario where a salesperson is pursuing a new account with the potential for substantial purchases. The salesperson's focus on winning the business may lead them to overlook warning signs related to credit difficulties. They might even bypass your internal credit checks to expedite the process. While this may secure the sale, it doesn't guarantee payment, and without payment, there is no sale.
With us, this situation doesn't arise. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We avoid purchasing invoices from customers with poor credit ratings, minimizing the risk of non-payment. However, please understand that our involvement doesn't tighten credit to the extent that it negatively impacts your business beyond your control.
If you have a new customer with questionable creditworthiness, the decision to do business with them remains yours. (Nevertheless, we reserve the right to say, "I told you so!")
While we may not purchase those invoices, you retain the freedom to extend credit terms as you see fit. You remain in control. Regardless of the decisions you make, our participation ensures you have access to more comprehensive, objective, and high-quality information for informed credit decisions compared to your previous practices.
We conduct thorough research on new clients and regularly monitor the credit ratings of your existing customers. This contrasts with the norm in many businesses, where routine credit updates on the established customer base are rare. 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. In contrast, 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 benefit from comprehensive, detailed reports on your accounts receivables as a whole. Our process includes 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 cash flow and credit management experience, we are eager to leverage our expertise for your benefit. Let us put our knowledge to work for you and help you achieve your financial goals.
How To Change Factoring Companies
Changing Your Invoice Finance Provider
Considering a switch in your invoice finance provider? This essential guide is designed to help you understand the nuances of UCCs, streamline the transition process, and identify critical questions for selecting your next financial partner.
Uniform Commercial Code (UCC) Explained
The UCC filing is a vital tool for invoice finance companies to safeguard their interests:
- It records asset rights.
- Notifies other lenders about your existing financial commitments.
- Assures that your finance company has priority over your invoices, similar to property mortgages or vehicle titles.
Transitioning Between Providers
Moving to a new provider involves a "buyout" - a process where your new financier settles the balance with the old one, much like mortgage refinancing. This is formalized through a Buyout Agreement.
Calculating the Buyout Amount
The buyout sum usually consists of your unpaid invoices minus reserves, plus additional fees from your previous financier. It's crucial to ask for a comprehensive breakdown to fully understand any extra charges or termination fees.
Cost Implications of a Buyout
The transition can be cost-effective if you use fresh invoices for the new financier. But be aware, using previously financed invoices could lead to duplicate fees. While some financiers may offer discounts, timely communication with your former provider is essential to avoid extra costs.
Time Considerations
Changing providers might extend the usual timeframe due to the intricacies of buyout calculations and required approvals. The buyout amount can fluctuate based on accumulating fees and ongoing payments. A seasoned financier can help expedite this process.
Complex Scenarios
In some instances, both your previous and new financiers might temporarily share rights to your invoices until all balances are cleared, though this is not commonly practiced.
Questions to Ponder Before Committing
- Is simultaneous collaboration with multiple invoice finance companies possible?
- What are the terms for changing providers, including any penalties?
- How does the new provider handle transaction processing and duration?
- What is the structure of communication with the finance company?
- Are there responsibilities for mailing costs of invoices?
- Does the provider charge extra for credit checks or new client setups?
- At what point does the provider start withholding reserves?
