Factoring Company Guide
First Step: Filling Out the Client Application
Start off by completing a basic client profile form that we'll provide. It'll ask for simple details like your company's name, location, what your business is about, and some info on your clients.
You might also need to provide documents like an accounts receivable aging report, or info on your clients' credit limits. Don't forget, we (the factor) are trying to gauge how creditworthy your clients are, beyond their payment history with your business. We're looking for a wider view of their overall credit health.
In this first step, we'll also discuss basic financial details. For instance, how many invoices do you want to factor each month (meaning, how much cash do you need quickly)? What will be the advance rate and the discount rate? And, how soon can we provide the advance?
Often, the answers to these questions depend on your clients' financial health and the expected monthly sales to be factored. Other factors can affect this too, like your industry, how long you've been in business, and your clients' risk profile. For example, if you have a lot of high-risk clients, you'll likely pay more in factoring fees than if your clients are slow-paying government bodies.
Remember, in the factoring business, volume matters. The more invoices you factor (the higher your volume), the better your rates will be.
We'll use the client profile you give us to determine if your business is a good candidate for factoring. Essentially, we're evaluating the risks against the rewards based on the information you've provided.
Once we give the green light, be ready to negotiate terms and conditions. This process takes into consideration various elements of the deal. For instance, if you're factoring $10,000, you won't get as good a deal as a company factoring $500,000.
During this negotiation, you'll gain a good understanding of what it costs to factor your accounts receivable. Once you've reached an agreement with us, the funding process gets underway. We conduct due diligence by looking into your clients' credit and any liens against your company. We also verify the authenticity of your invoice before purchasing your receivables and giving you the cash advance.
Factoring Company Benefits
Factoring Benefits: Get Ahead in the Game
- Forget about cash flow nightmares – focus on expanding your business.
- Ditch the stress of monthly loan payments. Get cash in a flash – 2 to 4 days!
- Stay in charge of your business destiny.
- Slash or completely eliminate those annoying payment collection costs.
- Call the shots on your cash flow by picking which invoices to sell.
- Stay one step ahead of clients who drag their feet on payments.
- Power up your production and sales with a constant cash stream.
- Take advantage of expert services for payment collection and credit checks.
- Make sure your payroll is always on point.
- Keep enough cash on hand for payroll taxes, no sweat.
- Enjoy the perks of bulk buying with ample cash reserves.
- Bolster your bargaining power for even better deals.
- Enhance your credit score with consistent, on-time payments.
- Have the cash ready for expanding your business ventures.
- Pump up your marketing with a healthy cash flow.
- Give your financial statements a healthy glow.
- Gain valuable insights from detailed accounts receivable reports.
Is Factoring For You
The Importance of Factoring
"Remember, a sale's not done until you've got the cash." Feeling like you're stuck in the role of a part-time banker for your clients? Let's break it down.
Have a gander at your accounts receivable. Those overdue accounts are more than just numbers – they're interest-free loans you're dishing out. That's not why you're in business, is it?
Put it this way: if your clients borrowed from a bank, they'd be coughing up interest left and right. But with you? They're getting a sweet deal. Meanwhile, you're missing out on cash that could be pumping up your own business. Think about what that's costing you in missed chances.
You’re in the business of selling, not financing. It's time to flip the script and stop letting your clients use your cash to float their business. Let’s get real about the costs here.
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
Gain a Competitive Edge with Quick and Continuous Cash Flow
Expert Credit Risk Assessment Included at No Extra Cost
Accurately assessing credit risk is a critical component of our factoring business. Our objective approach sets us apart from other providers.
We act as your dedicated credit department for both new and existing customers, providing you with a distinct advantage over managing these functions internally.
Imagine a scenario where a salesperson pursues a new account with the potential for substantial purchases. In their eagerness to secure the business, they may overlook credit warning signs and bypass internal credit checks. While this might result in a sale, it offers no guarantee of payment – and without payment, there is no sale.
With us, such situations are avoided. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We do not purchase invoices from customers with poor credit ratings, mitigating the risk of nonpayment. However, please understand that our involvement does not restrict your credit flexibility or negatively impact your business beyond your control.
Ultimately, the decision to do business with a new customer of questionable creditworthiness remains yours. (Nevertheless, we reserve the right to say, ""We told you so!"")
While we may not purchase those invoices, you retain the freedom to extend credit terms as you deem appropriate. You remain in control. With our participation, you gain access to comprehensive, objective, and high-quality information that empowers you to make informed credit decisions, surpassing your previous practices.
We diligently research new clients and regularly monitor the credit ratings of your existing customers. This stands in contrast to the neglect seen in many businesses, where routine credit updates on the established customer base are scarce. Such oversight can be a significant mistake.
Typically, businesses conduct credit checks only when it's too late – when problems have already escalated. 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 benefit from comprehensive and detailed reports on your accounts receivables as a whole. Our process includes accounting details, transactional insights, aging reports, and financial management reports. This invaluable data allows you to integrate it into your sales tracking, account history, and in-depth analysis.
With over 70 years of successful experience in managing cash flow and credit, we are eager to leverage our expertise for your benefit. Let us harness our knowledge to help you achieve your financial goals, gain a competitive edge, and ensure the continuous flow of cash for your business.
How To Change Factoring Companies
Changing Your Invoice Finance Provider
Considering a change in your invoice finance provider? Whether due to dissatisfaction or a strategic shift, our guide offers clear insights into the process. We cover everything from the nuances of UCCs to the steps of transitioning, along with essential questions to guide your decision for a new partner.
Uniform Commercial Code (UCC) Explained
Learn about UCC filings – a standard procedure for invoice finance companies safeguarding their interests:
- It records and tracks rights to assets.
- Provides transparency about existing financial agreements to other lenders.
- Guarantees the financier's primary claim on your invoices, much like a mortgage on a property or a title for a vehicle.
Transitioning Between Providers
Transitioning to a new provider involves a "buyout", similar to refinancing a mortgage. Your new financier will settle the balance with your previous one, as detailed in a Buyout Agreement.
Calculating the Buyout Amount
This amount typically includes the sum of unpaid invoices less reserves, plus fees from the former financier. It's important to ask for a detailed statement to fully understand any extra charges or termination fees.
Cost Implications of a Buyout
Transitioning can be cost-effective when managed with new invoices. However, reusing previously financed invoices could lead to dual fees. Some financiers may offer fee discounts, but it's crucial to inform your old provider promptly to avoid extra costs.
Time Considerations
The process might extend your usual operational timeline due to the complexities of buyout calculations and approvals. The buyout amount can vary based on accruing fees and ongoing payments. Choosing an experienced company can help make this transition smoother.
Complex Scenarios
In some instances, both your previous and new financiers might temporarily share rights to your invoices until the balance is settled, though this is not common practice.
Questions to Ponder Before Committing
- Is it feasible to engage with multiple invoice finance companies at the same time?
- What is the notice period for changing providers, and what penalties, if any, are involved?
- What are the payment processing times with the new provider?
- Who will be your main contacts at the finance company, and how many people will be involved?
- Are there any costs for mailing invoices?
- Are additional fees applicable for credit checks or onboarding new clients?
- When does the new provider start holding reserves?