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
Perks of Factoring: The Inside Scoop
Is Factoring For You
Recognizing the Importance of Factoring
"When you don't collect the money, a sale remains unfinished."
Have you ever felt like you're taking on 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. Congratulations, you're essentially providing credit to those customers. By not receiving timely payment for your products or services, you're essentially offering interest-free financing to your customers. This may not align with your original business intentions, does it?
Let's consider this:
If your customers were to approach a bank and borrow the same amount of money, they would undoubtedly expect to pay a significant amount of interest for that privilege.
Moreover:
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 essentially requesting you to finance their business by granting them extended payment terms, often exceeding 30 days.
However, have you ever taken a moment to contemplate 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 how factoring can help alleviate these challenges.
Factoring History
Factoring: Unlocking Financial Opportunities for Businesses
Welcome to the world of factoring, where businesses discover a gateway to financial opportunities. Whether you're a business owner, an aspiring entrepreneur, or seeking innovative financing solutions, factoring can be a game-changer in helping you seize growth and success.
Surprisingly, factoring often operates under the radar and remains unfamiliar to many in the business realm. Yet, it serves as a secret weapon for countless thriving enterprises, unlocking vast financial potential year after year.
So, what exactly is factoring? It's a dynamic financial tool that involves selling your accounts receivable (invoices) at a discounted rate. In today's competitive landscape, offering credit terms to customers is a common practice to attract and retain business. However, this can create cash flow challenges, especially for small or emerging businesses that rely on consistent cash flow.
Factoring has a fascinating history that spans centuries. It traces back to ancient civilizations, where innovative minds recognized the value of turning unpaid invoices into immediate funds. Over time, this practice evolved and adapted to meet the changing needs of businesses.
In the modern context, factoring acts as a catalyst for business growth and expansion. By leveraging factoring, businesses can gain quick access to much-needed funds. This infusion of cash enables them to cover operational costs, invest in new initiatives, manage inventory, and seize growth opportunities.
Factoring is not limited to specific industries. Its versatility allows businesses across various sectors, such as manufacturing, services, and wholesale, to leverage its benefits. Whether you're a supplier, a contractor, or a service provider, factoring can provide the financial boost you need to propel your business forward.
Factors, the key players in the factoring process, come in different forms. They can be specialized financial institutions or independent firms dedicated to providing factoring services. These experts understand the unique financial challenges businesses face and tailor their solutions accordingly.
Beyond providing immediate cash flow, factors offer additional value. They assist in credit checks, manage collections, and assume the risks associated with unpaid invoices. This comprehensive approach allows businesses to focus on their core operations while leaving the financial intricacies to the experts.
With factoring, businesses can break free from the constraints of traditional financing options. It offers a flexible alternative that adapts to your specific needs. Say goodbye to lengthy loan applications and rigid repayment terms. Factoring puts you in control, allowing you to unlock the capital tied up in your accounts receivable and utilize it to drive your business forward.
Join the ranks of businesses that have harnessed the power of factoring and experience the transformation it brings. Embrace the financial opportunities it presents, strengthen your cash flow, and unlock the full potential of your business. Factoring is your key to unlocking a world of financial possibilities.
Credit Risk
Quick Cash Advantage: Unlock Expert Credit Risk Assessment at No Extra Cost!
Precisely evaluating credit risk is a vital aspect of our factoring business. Very few, if any, clients can perform this task as objectively as we can.
At no additional fee, we serve as your dedicated credit department for both new and existing customers. This gives you a significant advantage over managing these functions internally.
Imagine a scenario where a salesperson is pursuing a new account with the potential for substantial purchases. Their focus on winning the business may cause them to overlook warning signs related to credit difficulties. They might even bypass your internal credit checks to expedite the process. While this could secure the sale, it won't guarantee payment, and without payment, there is no sale.
Rest assured, this won't happen with us. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We won't purchase the invoices of customers with poor credit ratings, minimizing the risk of nonpayment. However, please don't consider our involvement as a tightening of credit to the extent that it negatively impacts your business beyond your control.
The ultimate decision to do business with a new customer of questionable creditworthiness remains yours. (Nevertheless, we reserve the right to say, ""I told you so!"")
While we may not purchase those invoices, you still retain the freedom to extend credit terms as you see fit. You remain in control. Regardless of the decisions you make, our participation ensures that you have access to more comprehensive, objective, and high-quality information for informed credit decisions compared to your past practices.
We thoroughly research new clients and, equally importantly, regularly monitor the credit ratings of your existing customers. This contrasts with the rare routine credit updates on the established customer base in many businesses. Neglecting this can be a grave mistake.
Typically, businesses only conduct a credit check when it's too late, and the problem has already spiraled out of control. On the other hand, we promptly inform you of any changes in the credit status of your existing customers.
In addition to providing specific customer credit information, you'll also enjoy the benefits of comprehensive, detailed reports on your accounts receivables as a whole. As part of our process, you'll receive accounting details, transactional insights, aging reports, and financial management reports. This data empowers you to incorporate it into your sales tracking, account history, and in-depth analysis.
With over 70 years of successful experience in cash flow and credit management, we are eager to leverage our expertise for your benefit. Let us apply our knowledge to help you achieve your financial goals and unlock the full potential of your business.
How To Change Factoring Companies
How to Change Invoice Factoring Companies
All you need to learn about switching your invoice factoring service.
Looking for a different invoice factoring service? Not happy with your current one? Thinking about saying goodbye to your current factoring service? What should you know before you switch invoice factoring services?
Here's what you need to know and more:
What's a UCC and why does it matter if I want to change factoring services?
Usually, an invoice factoring service will file a Uniform Commercial Code (UCC) to ensure their claim on the invoices they fund is priority. This is standard. The UCC helps invoice factoring services, banks, and commercial lenders keep track of who has a claim on which assets. Because the invoices you collect and pay change every day, factoring services need to file a 'blanket' UCC to claim all your receivables. The UCC simply warns other lenders that a Security Agreement exists between your business and the invoice factoring service. Your factoring deal details, such as the rates and which accounts are factored, are explained in the Security Agreement, which isn't public. A UCC is kind of like a first mortgage on your business.
The Process of Buyout
The lender with the earliest dated UCC filing is said to have first dibs on the pledged assets. To switch factoring services, the new service must pay off the old one. A 'buyout' is when the new factoring service pays off the old one with the money from your first funding with them. The Buyout Agreement outlines the transition process and is a three-party agreement signed by the old factoring service, the new factoring service, and your business.
How the Buyout Amount is Calculated:
Generally, the buyout amount is calculated by taking the total outstanding Gross Receivables, subtracting any reserves, and then adding in fees due to the old factoring service. Understanding the buyout amount is important because once you authorize that amount and the old service is paid off, you are only dealing with the new service.
What is the cost of the buyout?
If you can provide brand new invoices to the new factoring service, which they can use to pay off the outstanding invoices at your old service, then there would be no extra cost for you to make the change. But in most cases, companies need to resubmit at least a portion of invoices already factored with the old service to the new service. Depending on the size of the transaction, some factoring services offer reduced fees on invoices part of a buyout.
How long does a buyout take?
When you're changing factoring services, expect the first funding to take a two to three more days than the normal setup process. By aligning yourself with a factoring service familiar with the buyout process they can guide you through timing to minimize any delays in your funding as a result of the transition.
What if my situation is more complicated?
Although it is not common practice, it's possible that the old and the new factoring services can work together via an Intercreditor or Subordination Agreement until the old service is paid off.
Questions You Should Have Asked Your Current Factoring Company
- How many factoring companies can I use at one time? (You can only use one)
- What's the process and penalty for leaving without giving notice?
- Do you use a bank lockbox to process my customer payments?
- How long do you keep my original invoices before sending them to my customers?
- Who will be my contact at your company? Is it one person or multiple?
- Do I need to pay for postage for mailing my invoices?
- Do you charge me for credit checks on new customers?
- Do you hold my invoices in batches and charge fees on all invoices in a batch until the last one is collected?
- Do you start holding reserves once a customer's invoice is 60 days old, even though I have a 90-day recourse period?
Understanding these factors will help you make a better decision when choosing a new factoring company and avoiding unnecessary costs or complications in the future.
