Still Wondering What Is Factoring And How Factoring Works?

Posted by John Mauldin on Wed, Jan 23, 2013

What is factoring?Happy 2013 to all of you!

If you own a small business and you’re trying to come up with a game plan for the New Year, something to consider is how your cash flow is managed. 

It is important to remember, as always, that cash is king. If your business is to survive, you must have cash to:

  • Keep your vendors happy
  • Purchase inventory
  • Make that all-important Friday payroll

You may be a business owner who is already a big planner:

  • You stringently manage your receivables
  • You always know what vendors are due next
  • You have an idea of what your payroll is

Another layer you could add to your planning mentality is short-term business loans. One of the more common types is factoring.

What Is Factoring?

Factoring is a great and easy way to supplement your cash flow.

Factoring is where you sell your receivables relating to creditworthy customers to a third party known as a factoring company. Advance rates vary from company to company but are generally around 80%. Once the invoice is paid, you get back the remaining 20% less any applicable fees. 

With factoring, you don’t have to worry about one huge order cramping cash flow. You also don’t have to worry about waiting for your customers who pay in 30, 60, 90 and even 120 days. The root of stress for most small business owners is not having the cash on hand necessary for day-to-day tasks.

Factoring is a great way to bridge the gap between when an invoice is billed and when the cash is collected. It really acts as an insurance policy.

How It Works

Factoring an invoice is a pretty simple process. Once you’ve been approved by a factoring company to factor invoices, your next step is to compile your creditworthy customers, because those need to be approved as well. The factoring company needs basic customer information:

  • Customer name
  • Contact name, phone number, email address for accounts payable
  • Contact information for the person responsible for approving invoices
  • Peak receivable balance

Once your customers are approved, then you’re ready to factor some invoices. You simply enter the invoice online and upload a copy of the invoice and any supporting documentation (bill of lading, purchase order, etc.). Then the factor purchases the invoice(s). Then the funds (face value of the invoice at the specified advance rate) are wired to your bank.

When the invoice is due, the customer pays the invoice to the factoring company. Then the remaining portion of the invoice is wired back to you, less the applicable fees.

Some Helpful Hints

The Fast A/R team has learned a few things in their extensive years in the commercial finance industry. We’d like to pass a few of those things on to you:

  • Factor all of your creditworthy receivables. This allows you to control and improve your cash flow. While you are paying associated fees, having the peace of mind of controlled cash flow is worth the price.
  • If you only need a little cash flow help, look at factoring just a few receivables from your most creditworthy customers. These customers may pay faster, which allows you improve your cash flow while minimizing your factoring costs. 
  • Consider ending quick pay discounts. Factoring gets the cash you need in hand. 

Trust us, we’ve seen how factoring improves a company’s cash flow. Best of luck to you in 2013!

Fast A/R Funding specializes in helping small businesses bridge the cash flow gap with factoring. To get more educational information on factoring, head to Cash Flow University by clicking the button below. To speak with one of our small business finance consultants, call 888.833.2286.

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Tags: Invoice Factoring, Accounts Receivable Factoring