What is Factoring
Factoring involves the selling of a company’s accounts receivables, at a discount, to a financing company to raise capital. A portion of the value of the receivable, typically 75% - 90%, is advanced at the time of purchase. The financing company takes on the credit risk of the company’s debtor. At the time the balance is collected the remainder of the receivable is paid to the company less a fee.
Benefits of Factoring
A Company is owed $10,000 for products/services by one of its commercial clients. The Company knows it will take 60 days to be paid by the client and decides to increase its cashflow using factoring. The finance company considers the strength of the receivable and transfers 80% of the invoice total to the Company’s bank account ($8,000.00) within 24 hours. At the end of the 60 day payment period the Company received the remaining 20% of the invoice amount less the factoring fee.
||Allows access to working capital when needed to make important payment deadlines or fulfill new orders
Flexible and customized funding arrangements
Credit protection on account receivable
Reduced time managing and administrating receivables
Offering better payment terms to large customers to increase sales
Without asking for COD you can achieve a competitive edge over other firms
Pay suppliers faster and take advantage of early pay discounts
Company growth means more invoices so more funding can be accessed
The freeing of existing Lines of Credit to be used more effectively
As factoring extends credit to the Company’s client the finance company is more concerned about their customers’ ability to pay than the Company’s financial status. This means a Company with creditworthy customer may be able to factor even if it does not qualify for a loan itself.
As factoring is not a loan it does not create a liability on the balance sheet or encumber assets. It is the sale of an asset--in this case the invoice. While factoring is considered one of the most expensive forms of financing as compared to the interest rate banks charge in many cases you can access the monies you require to operate without the constraints and time often required to have a bank meet your needs.
Typically the financing company will provide services banks do not including: taking over a significant portion of the accounting work for their clients, help with credit checks, and generating financial reports to let you know where you stand.
Contact us to find out if factoring is the solution for your needs.