Factoring Company Guide
Step One: The Client Application
You start by completing a simple client profile that we provide. This will include basic details like your company's name, address, what your business does, and some info about your customers.
You might also have to provide some documents like an accounts receivable aging report, or your customers' credit limits. The goal here is for us, the factor, to understand how creditworthy your customers are, beyond just their history with you. We want a more complete picture of their credit situation.
In this early phase, you'll also discuss financial arrangements with the factor. This includes things like how many invoices you plan to factor each month (or how cash-ready you need to be), the advance rate, the discount rate, and how fast we can provide the advance.
Usually, the answers to these questions will depend on your customers' financial strength and the expected monthly sales volume to be factored. Things like the type of industry, how long you've been in operation, and the general riskiness of your customers can make a difference. For example, factoring for a large number of high-risk clients will be more expensive than for a small number of slow-paying government agencies.
In factoring, volume is crucial. The more you factor (the total dollar amount of invoices), the better your rates will be.
We'll use the client profile you submit to decide if your business is a good fit for factoring. This involves weighing the potential risks and benefits based on the information you provided.
Once you're approved, you'll get to negotiate terms and conditions. The negotiation process considers various aspects of the deal. For instance, if you're factoring $10,000, you can't expect as good a deal as a company that wants to factor $500,000.
During negotiations, you'll learn all about the cost of factoring your accounts receivable. After an agreement is reached with the factor, we start the funding process. This involves checking your customers' credit, looking for any liens against your company, and verifying the validity of your invoice before buying your receivables and advancing money to you.
Factoring Company Benefits
Factoring Perks: Catapult Your Business to New Heights
- Toss out cash flow worries and zoom in on business growth.
- No more loan repayment blues. Hello, cash in 2-4 days!
- Keep the command of your business in your hands.
- Drastically reduce or even say goodbye to chasing payments.
- Master your cash flow by picking and choosing invoices to sell.
- Get the upper hand with slow-paying clients.
- Fuel your production and sales with a steady cash supply.
- Enjoy the luxury of professional services for payment collection and credit checks.
- Guarantee that your payroll is always on track.
- Always be ready for payroll taxes – no last-minute scrambles.
- Snag those bulk purchase discounts with ease.
- Beef up your buying power for even sweeter deals.
- Boost your credit rating with cash always at hand for bills.
- Expand your business horizons with ample cash reserves.
- Rev up your marketing efforts with a solid cash flow.
- Polish your financial statements to a shine.
- Dive into detailed, insightful reports about your accounts receivable.
Is Factoring For You
The Importance of Factoring
"Only when the money’s in your pocket is a sale complete." Ever feel like you’re doubling as a banker for your customers? It’s time to wake up and smell the coffee.
Take a peek at your accounts receivable. Those invoices overdue for over 30 days? That's you, extending credit without interest. Bet you didn’t plan on being a lender when you started your business.
Picture this: If those same customers went to a bank, they'd be paying interest. But to you? They get a free pass. And what do you get? Missed opportunities to grow your business. Think about the real cost of that.
Here’s the deal: You’re not in the business to finance your customers’ operations. Let’s stop the cycle and take control of your cash flow. It's time to play it smart.
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
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 Your Invoice Finance Provider
Considering a change in your invoice finance provider? This guide offers practical advice for those dissatisfied or looking for better options. We provide clear insights into understanding UCCs, the steps for transitioning, and essential questions to ask before committing to a new financial partner.
Uniform Commercial Code (UCC) Explained
Invoice finance companies use UCC filings to secure their interests. Key functions of the UCC include:
- Asset rights tracking.
- Notifying other lenders of existing agreements.
- Securing first rights to your invoices, akin to a mortgage or vehicle title.
Transitioning Between Providers
The process of switching providers involves a "buyout." Your new provider will settle balances with the old one, similar to mortgage refinancing. This step is detailed in a Buyout Agreement, signed by all involved parties.
Calculating the Buyout Amount
The buyout sum typically includes unpaid invoices minus reserves and additional fees. It's crucial to request a comprehensive breakdown to understand all charges, including potential early termination fees.
Cost Implications of a Buyout
Transitioning can be financially neutral if you offer new invoices to the new provider. Be cautious of double fees when resubmitting previously financed invoices. Timely communication with your old provider is vital to avoid extra charges.
Time Considerations
Switching may extend processing times due to buyout calculations. The buyout amount can fluctuate with accruing fees and ongoing payments. An experienced company can streamline this process.
Complex Scenarios
In some cases, both old and new financiers may share rights to your invoices until the balance is settled. However, this scenario is not typical.
Questions to Ponder Before Committing
- Is it possible to work with multiple invoice finance companies at the same time?
- What are the notice periods and penalties for changing providers?
- What is the payment processing timeline with the new provider?
- Who will be your primary contacts at the finance company?
- Are there any postage costs for mailing invoices?
- Are there extra fees for credit checks or setting up new customers?
- When does the provider start holding reserves?
