Cash Flow Invoice Factoring

Factoring is the selling of your accounts receivable for cash versus waiting 30-60 or 90 days to be paid  by your customer. 

The Q & A below will help you understand Invoice Factoring and how it can provide immediate working capital, that your business may need.

 

FAQs - GENERAL FACTORING INFORMATION

Q: What Is A Factoring Company or Invoice Line of Credit Lender? A: A commercial finance company that specializes in the purchase of invoices or accounts receivable for cash. Q: Is factoring a new financing option? A: Factoring has been used for centuries. It's one of the oldest forms of financing. Until recently, factoring was primarily used in the garment and textile industries. Today, factoring is a widely used, viable funding solution for all businesses that extend credit to credit-worthy commercial customers. Q: How does factoring or Invoice Lines of Credit differ from bank funding? A: Factoring decisions based on the credit-worthiness of your customers; a bank makes credit decisions based on your company's financial history, cash flow and collateral. Because factoring is not a loan, no liability appears on your balance sheet. Most importantly, funding decisions are made in days or hours-while banks generally take weeks or even months. Q: Why would a company sell accounts receivable? A: Companies with recurring cash-flow problems often can't afford to wait 30, 60 or even 90 days for invoice payment. They need cash to meet immediate financial demands of their business. Factoring provides this cash by funding the purchase of accounts receivable, often within 24 hours after invoices are created. Q: What companies benefit most from factoring or setting up an Invoice Line of Credit Accounts? A: Factoring works well for startups as well as high-growth businesses, including those cyclical in nature. Factoring is also well suited for under-capitalized companies with strong customers, turnarounds or companies with cash-flow problems. Q: What is the major benefit of factoring? A: Immediate cash for accounts receivable instead of waiting 30, 60 or even 90 days for customers to pay. Decision to finance company is based on the companies customers' credit-worthiness instead of your client's balance sheet. If the companies customers have good credit, your client can get financing, no matter how limited or problematic your company's financial history. Q: What does factoring and Invoice Lines of Credit cost? A: Rates are based on individual and specific circumstances. Factoring rates depend on the credit-worthiness of your customers, your average invoice, average payment cycle, factoring volume and other elements. In general, the cost of factoring is outweighed by its significant benefits: access to immediate cash, credit analysis, collection work and accounts-receivable reporting. Q: Is factoring a type of loan? A: No. Factoring is not a loan. It is the purchase of an asset, accounts receivable, at a discount by a financial institution called a factor. A traditional bank loan uses a companies assets as collateral and typically requires personal guarantees. Invoice factoring or account receivables factoring relies on the credit-worthiness of the customers, not your client's balance sheet or history. Q: What is the difference between factoring invoices "without recourse" and factoring invoices "with recourse"? A: When an invoice is factored without recourse, it is considered factoring on a "non-recourse" basis. In this situation, the factor takes the credit risk of the client's customers, thereby protecting the client from credit loss. When an invoice is factored with recourse, it means the client is ultimately responsible for payment, regardless of whether the client's customer pays. Q: When is factoring NOT a good fit for a business? A: Generally factoring is not a good fit in the following situations: Your business operates on low margins (less than 10%). Your business has significant cash reserves free of cash-flow concerns. Your business serves as a sub-contactor to a less-than-established general contractor. Your business involves Medicaid or Medicare-based accounts receivable. Your business sells almost entirely to less than credit-worthy customers. Your business has a significant amount of accounts receivable that are already overdue.

What is Purchase Order Funding?  Purchase Order Funding is slightly harder to acquire, however is very helpful for Business who make large purchases and resell to a third party (Import)  Unfortunately the Purchase Order Funding Lenders (in most cases) DO NOT Factor.  So small companies need a Middleman who can broker both deals.  These middlemen are called Master Brokers.  For more information on Purchase Order Funding and the advantages go to What Is Purchase Order Funding?

 

History of Factoring

Understanding Invoice Factoring and how it works can change the path of your small Business.  Factoring has been practiced for centuries.  The Romans sold promissory notes at a discount as did the Phoenicians.  The word "factor" comes from Latin, the language of Rome.  It means "to do" or "to make."   The Pilgrims journeys to America were financed by advances from a Factor who provided the funds to pay for the journey.  The Pilgrims repaid the money with earnings from America.  Factoring to this day is an extremely common business practice in Europe whereas many American business men have never heard of it. This year alone thousands of businesses will Factor billions of dollars in accounts receivable, and they are doing it for profit, growth, and in some cases, their very survival