What is factoring accounts receivables?
Factoring receivables (also called invoice factoring) is the selling of invoices or receivables for immediate cash without taking on additional debt or diluting equity.
How can invoice factoring benefit my company?
Factoring receivables can benefit your company by providing regular cash infusions that can be used to improve cash flow, bolster working capital, and enhance revenue-producing assets and efforts. Businesses can also reduce their time spent on managing receivables and collections by using factoring services.
What size invoices can be used for factoring?
This varies by factoring institution. Some large commercial financial firms may require a minimum such as $10,000 per month yet there are plenty of firms that will factor an amount as low as $1,000.
What type of industries can make use of factoring receivables?
A range of industries commonly use factoring receivables, including trucking, freight, and transportation; staffing and payroll; construction and building; oil, gas, and energy; manufacturing; textile, garment, and clothing; farming and agriculture; government contracting; business services; and information technology and telecom. These are some of the most common industries that are factored but almost any business in any industry can be factored.
Does location matter when factoring?
Many large invoice factoring firms will provide factoring services across the nation and even internationally while some firms are dedicated to one city, state or region. So if your company primarily conducts business within your home city, there may be benefits to working with a local factoring firm. Likewise if your company has clients across the U.S., a larger firm may be advantageous.
How many invoices do I have to factor at once?
Again, this varies with the individual firm. Some may require factoring all invoices per month while other firms will allow you to select which ones to use. If possible, choose to factor the largest dollar value invoices for the lowest factoring expenses.
Are my receivables liened as collateral?
Yes. Invoice factoring companies generally require a first position on all accounts receivable while you are factoring. Some firms may partner with a bank, and in these cases the bank would need to subordinate a portion of the receivables or all of them, which often works well to both institutions.
Do I have to sign a personal guarantee?
Yes. The business owner(s) are required to sign a personal guaranty. The Guarantee protects the factoring company against fraud; it is routinely used by those in the factoring receivables and commercial finance industry.
What is the difference between Non-Recourse Factoring and Recourse Factoring?
With non-recourse factoring, the factoring company takes on the risk should the customer (debtor) not pay its invoice, protecting your company from bad debt. The factoring company will take over the collections process and ultimately the bad debt should the debtor fail to pay. With recourse factoring, the factoring company splits the credit risk with your company. Should the debtor not pay its invoice, it is sent back to your company, who is then responsible for either collecting what is owed or assuming the bad debt.
Do factoring companies offer both non-recourse and recourse factoring?
Most established factoring companies backed by conglomerate financial institutions offer non-recourse factoring, which is a higher risk for the factoring company. Many new invoice factoring companies without significant financial backing, however, will only offer recourse factoring, which is less risky for the factor.
How long must businesses commit to factoring receivables?
Each factor has different requirements as far as contractual commitments. Some may require a 6-month or 12-month contract while others do not.
What are the costs associated with factoring?
Of course each institution charges fees as it sees fit and businesses should shop around for best rates and services. Some will charge a flat fee per invoice while others will charge a percentage fee based on how long it takes to collect payment on the invoice. Some may charge an application fee but many do not. Some firms offer discounts for high volume invoicing with long contract terms. One-time factoring or spot factoring generally costs more. Be sure to always establish these fees upfront so there are no surprises.
How long does it take to process my application?
Some factoring companies can offer same-day processing but most take between four to seven business days to send payment for a new account. Preliminary approvals generally take between 24-48 hours via a term sheet that details the basic terms of factoring receivables. The verification process, where the factoring company performs due diligence on the submitted invoices, is generally the most time-consuming part of the process.
When do I receive the monies from selling my invoices?
With pre-approved debtors, the factor usually submits payment for all invoices within 24-48 hours of receipt though it could take longer. Please always read the policies and guidelines for each factoring company.
What happens when a company sells its accounts receivables to a factor?
The factoring company then becomes responsible for collecting the invoice from the company’s client(s). This transaction is off the balance sheet and does not impact a company’s credit score one way or another. The company then continues to perform business as usual as the factor handles collections’ duties.
What type of companies actually purchase accounts receivables?
A range of specialty and non specialty factoring companies purchase accounts receivables as do some commercial finance institutions and banks.
How does a business qualify for factoring services?
Qualifying for factoring is fairly easy. Does your company have clients that are medium to large size corporations with good to excellent credit scores? Does your company contract with the government? If you answered yes to either of these questions, your company likely qualifies for factoring services.
Is factoring similar to a bank loan?
Factoring services and loans are different. Loans must be paid back and are issued by banks to established companies with a record of growth and a good credit score. Factoring is an advance on existing receivables and is offered based on the credit of the company being invoiced. So even if a business has been rejected by a bank for a loan, it can still get cash with factoring. It does not need to have good credit or be established. The two are only similar in that they are both commercial financing options.
Are factors also collections companies?
Most factors will handle the receivables and collections aspect of all invoices they have purchased. In this capacity, the factor serves as a company’s collections department though factoring companies are not collection agencies in and of themselves. It is, however, a common industry misperception that many businesses think of factoring companies as collections companies.
What will clients think about sending their payment to a factoring company?
Many clients may not notice and those in industries that commonly use factoring are not likely to think anything about it. The client is not affected at all by the factoring process but if you are concerned about this, you can discuss it with the factor. They are accustomed to working with clients for this purpose and most are willing to explain the factoring process to them. If you are discussing this directly with your client, a simply explanation such as, “we’ve outsourced our receivables processing,” is usually sufficient.
Isn’t factoring receivables used by businesses in trouble?
No. Businesses of all shapes and sizes use invoice factoring for a number of reasons. New businesses use factoring because banks won’t lend to them. Fast-growing companies or those moving into new markets or territories use factoring to get cash quickly without having to wait on a loan. Companies in manufacturing, freight and transportation use factoring because it is the preferred form of financing for their industry. Though it is true that some businesses going through a rough patch may use factoring, using factoring does not necessarily mean a business is in trouble.
What is the difference in debt factoring and invoice discounting?
Debt factoring is another term used for invoice factoring. Here the term debt refers to the debtor or the company’s client that is being used for factoring. It is the company’s client or the debtor that the factor is going to run a credit check on in order to proceed with the factoring process.
Invoice discounting is similar to invoice factoring except your company retains control of the invoice itself. When payment is received, the funds are deposited into an account managed by the factor. Invoice discounting is generally only used by very large firms factoring the largest dollar amounts.