What is Factoring? I know a lot of small business owners have heard the term factoring, or invoice discounting before and have an understanding that factoring involves getting the cash now instead of waiting 30, 60 or 90 days to be paid by their customers.
The purpose of this article is to give the factoring novice a basic understanding of what factoring is and if their company may qualify.
Along with the definition on our website Wikipedia does a good job of defining what is Factoring. "Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. The factor provides financing to the seller of the accounts in the form of a cash "advance," often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor's discount fee (commission) and other charges, upon collection. Factoring differs from a bank loan in several ways. The emphasis is on the value of the receivables (essentially a financial asset), whereas a bank focuses more on the value of the borrower's total assets, and often considers, in underwriting the loan, the value attributable to non-accounts collateral owned by the borrower also, such as inventory, equipment, and real property, i.e., matters beyond the credit worthiness of the firm's accounts receivables and of the account debtors (obligors) thereon. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "credit risk", that a purchased account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan."
Does your firm qualify for factoring? The following is a list of high level attributes that your company should have in order to qualify for factoring.
B to B - Factoring involves the financing of invoices due from other businesses. Most factors will not finance a business to consumer (B to C) invoice.
Terms of Sale -Your company should offer open account terms to your customer. Factors typically will not finance, cash in advance or cash on delivery invoices. The reason for this is factoring is really the financing of unsecured loans that businesses have made to other businesses in the form of credit terms for the purchase of goods or services. If a customer is paying when goods are provided then there isn't any loan to finance.
- Credit Strength of your Customers - In underwriting your company for a new factoring line of credit the factoring company will be spending most of the time focusing on the credit strength or your customers. Because your customers are the primary source of repayment factors examine how long your customers have been in business and their general financial condition. The stronger the credit strenght of your customers the more likely you will be approved for a factoring line.
Fast A/R Funding is a traditional factoring firm with one major difference, we built our own factoring system from the ground up to make our program completely electronic. You will never be asked to send us paper documents by mail.
What is factoring? learn more about Fast A/R Fundling click the link below.
