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: Transform Your Business's Financial Health
- Redirect your energy towards growing your business, free from cash flow distractions.
- Avoid the constraints of loan repayments with immediate cash availability.
- Keep full control over your business decisions and direction.
- Substantially lower the expenses incurred in payment collections.
- Take charge of your cash flow by selling selected invoices.
- Gain an upper hand over clients with delayed payment habits.
- Capitalize on a stable cash flow to boost production and sales.
- Access expert services for efficient payment collections and credit checks.
- Ensure your payroll is always funded and on time.
- Maintain adequate funds for payroll tax obligations.
- Enjoy purchasing advantages by buying materials in bulk.
- Improve your negotiating position for early payments or large orders.
- Consistently pay your bills on time to enhance your credit score.
- Invest in expanding and diversifying your business.
- Allocate adequate resources for effective marketing campaigns.
- Notice a significant improvement in your financial documentation.
- Benefit from detailed, actionable reports on your accounts receivable.
Is Factoring For You
The Value of Factoring for Your Business
"When you don't collect payment, a sale remains unfinished."
Do you often find yourself playing 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. It's worth acknowledging that you're effectively extending credit to those customers. By not receiving prompt payment for your products or services, you're essentially offering interest-free financing to your customers. This might not align with your original business intentions, does it?
Let's think about this:
If your customers were to borrow the same amount of money from a bank, they would undoubtedly expect to pay a significant amount of interest for that privilege.
What's more:
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 asking you to finance their business by granting 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? It's worth reflecting on the impact this has on your business and exploring the benefits that factoring can bring.
Factoring History
Factoring History
Hello Business Mavericks and Future Moguls! Ever heard of factoring? It's the unsung hero in the finance world, powering up businesses like yours across America.
It's almost a conspiracy: factoring is hardly ever talked about in business courses or strategy meetings. Yet, it's this secret ingredient that frees up billions of dollars, catapulting businesses to new heights.
What’s factoring, you ask? It's buying invoices at a bargain, a clever tactic for credit-extending businesses. And it's not some new-age gimmick; it’s been around since the days of ancient Mesopotamia.
History is full of factoring success stories, from the Romans to the American colonists, who used it as their financial lifeline. Unlike the slow traditional banking of the past, factoring was the express lane to cash flow.
Today, factoring stands as a titan in the financial world, especially for those who feel let down by traditional banking. It’s the behind-the-scenes hero for thousands of businesses, turning billions in receivables into real, spendable cash. Factoring isn't just about staying afloat; it's about sailing ahead of the competition.
Credit Risk
Unleash Your Business Potential with Quick Cash and Expert Credit Risk Assessment
Gain a Competitive Advantage at No Additional Cost
Accurately evaluating credit risk is a fundamental aspect of our factoring services. Our objective approach sets us apart, as very few clients can perform this function as effectively as we do.
As part of our comprehensive offering, we serve as your dedicated credit department for both new and existing customers. This gives you a significant edge over managing these tasks in-house, without incurring any extra fees.
Imagine a scenario where a salesperson is pursuing a new account with the potential for substantial purchases. In their eagerness to secure the business, they may overlook warning signs of credit difficulties and bypass your internal credit checks. While this may result in a quick sale, it offers no guarantee of timely payment, which is essential for sustained success.
With us, you can avoid such pitfalls. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We refrain from purchasing invoices from customers with poor credit ratings, minimizing the risk of nonpayment. Importantly, our involvement does not imply a tightening of credit that could negatively impact your business beyond your control.
Ultimately, the decision to do business with a new customer of questionable creditworthiness remains yours. (However, we reserve the right to say, "We warned you!")
While we may not purchase those invoices, you retain the freedom to extend credit terms as you see fit. You remain in complete control. Regardless of the decisions you make, our participation ensures you have access to comprehensive, objective, and high-quality information to make informed credit decisions, surpassing your previous practices.
We conduct thorough research on new clients and diligently monitor the credit ratings of your existing customers. This stands in stark contrast to the common practice of neglecting routine credit updates for established customers, which can be a costly oversight.
Most businesses only conduct credit checks when problems have already spiraled out of control. In contrast, we promptly inform you of any changes in the credit status of your existing customers, empowering you to take proactive measures.
In addition to providing specific customer credit information, we offer comprehensive reports on your accounts receivables. These reports include accounting details, transactional insights, aging reports, and financial management reports. This valuable data allows you to analyze sales performance, track account history, and make informed decisions to drive your business forward.
With over 70 years of successful experience managing cash flow and credit, we are excited to leverage our expertise for your benefit. Let us put our knowledge to work, helping you achieve your financial goals and unlock the full potential of your business. Experience the advantages of quick cash and expert credit risk assessment at no additional cost.
How To Change Factoring Companies
Changing Invoice Financing Providers
Want to switch your invoice financing provider? Not satisfied with your current one? Planning to bid goodbye to your present provider? Not sure what to know before making the switch? Here's a simple guide with all the answers.
Understanding UCC and its role in changing providers
Typically, an invoice financing company (also called a factor) will file a Uniform Commercial Code (UCC). This is like staking a claim on the invoices they've funded. This helps to keep track of who's got a claim on what assets, especially because invoices change every day - some are paid, some are collected, and some new ones are created.
So, the factor files a 'blanket' UCC covering all your invoices, even though you might not be getting funding for all your sales. It's just not practical to file a new UCC for every single invoice. The UCC is like a warning sign for other lenders that there's a deal between your business and the factor.
The specifics of your agreement with the factor, like rates and which accounts are factored, are outlined in a private Security Agreement. A UCC is kind of like having a first mortgage on your business.
The process of changing factors
The factor with the oldest UCC is said to be in the 'First Position' on the collateral. This means they have the first right to collect payments on your invoices and any related items.
If you want to change factors, the old one must be paid off by the new one. This is similar to refinancing your house. The old factor's claim is released and the new one's claim is filed.
The process where the new factor pays off the old one using money from your first funding is called a 'buyout'. The Buyout Agreement, which outlines the transition process, is signed by the old factor, new factor, and your company. In this agreement, you approve the 'buyout figure' provided by the old factor.
How is the Buyout Figure Calculated:
The buyout figure is usually calculated by subtracting any reserves from the Gross Receivables Outstanding and adding in fees due to the old factor. It's good to ask for a breakdown of this figure so you can understand if there are any early termination fees or other charges added to your usual factoring fees.
Once the old factor is paid off, you only have to deal with the new factor. If you're changing from an 80% advance rate to a 90% advance rate, you might have enough money to pay off the old factor without needing more invoices.
How much does the buyout cost?
If you can give the new factor new invoices to pay off the old ones, there's no additional cost for the switch. As payments come in on the old invoices, those payments are forwarded to the new factor who then sends them to you.
However, if you need to resubmit some invoices already factored with the old factor to the new one, those invoices will incur fees from both factors. As a result, your factoring fees for the first month after the change could be higher than normal. If the new factor's rate is lower, you can calculate how long it will take to recover this cost and make a cost-benefit analysis.
How long does a buyout take?
When changing factors, expect the first funding to take a couple of days more than the usual setup process. This extra time is needed for invoice verification and for calculating the buyout figures.
What if my situation is not that easy?
In some cases, the old factor and the new one can work together via an Intercreditor or Subordination Agreement until the old factor is paid off. The old factor has rights to invoices up to a certain date and the new one has rights to all invoices after that date.
Questions you might have wished you asked before signing up with your current factor:
- How many factors can I use at one time? (The universal answer is one, according to the UCC.)
- If I want to change factors, how much notice do I need to give?
- What is the penalty if I leave without giving the required notice?
- Do you use a bank lock box to post my customer payments? If so, how long does it take for a customer's payment to post to my account from the date the bank receives it?
- How long do you hold my original invoices before sending them to my customers?
- How many different people will I work with at your company?
- Do I need to pay for postage for you to mail my invoices?
- Do you charge me every time I have a new customer to check or set up?
- Do you start holding reserves once a customer hits 60 days even though I have 90 day recourse?