FACTORING
How factoring works
One of the most common and widely used forms of financing is called “factoring”. Factoring is also known as “Accounts Receivable Financing”. If you've heard of factoring or even used it in the past, I urge you to forget everything you have heard or experienced. Factoring has evolved in the past few years and when used properly can vault a company into prosperity. So please read the following with an open mind.
Factoring is simply the selling of a company’s accounts receivables at a discount.
You deliver your product or perform your service. You then invoice your customer and wait for payment. This is usually when the trouble begins. The average net 30 invoice is paid in approximately 42 days. Meanwhile you’ve purchased materials, made payroll and covered overhead expenses. This may be fine for the short term but the expenses don’t stop and wait for the income. This is where factoring comes in. Remember, the bank has already turned you down for a line of credit.
So the product is delivered and the invoice is sent. It sure would be nice to have the capital right away so you can move on to the next delivery. Simply sell that invoice to a Factor (the funding company) for a discount. The fees for factoring a standard net 30 invoice range from 2% to 6%. There are many things that determine what your fees may be and all fees are generally negotiable. Next is a generic outline of how the factoring process works. Keep in mind that funders will have different versions and programs, but this is generally how it works.
Factoring Procedure
1) Fill out and send brief information form with required docs
2) Have conference call with Factor and BFS
This call will answer any and all questions you have as well as determine fees
3) A contract will be overnighted to you, once a Letter of Intent is signed.
This is NOT a term contract. (Unless one is negotiated) Every business to business deal needs a contract. It will quote the fees and other parameters.
4) You execute contract and send it back to Factor with a due diligence check. This check may be refunded in full when you have reached $100,000 of funded invoices. (varies)
5) Factor performs due diligence to be sure all matters are in order.
Such as:
no liens on receivables
company in good standing
contracts with government and/or commercial customers allow for and are conducive to factoring
creditworthiness of invoice payors
This takes approximately 10 to 14 business days. (varies)
6) Account opens
7) ONLY the customers that you wish to factor are then notified of factors presence and instructed to send payment to new address. Payment is still made out to your company. You only factor the invoices you want, when you want. No obligation to factor every month. Although, used properly, factoring regularly can dramatically increase your business capabilities.
8) You deliver your product or service and invoice as usual. You then send (fax) a copy of the invoice to the factor.
9) The factor verifies the delivery has been made and accepted.
10) Within 24 to 36 hours of receiving invoice, depending on delivery verification, 80% (varies) of invoice amount is wired to your account. This is not a loan, this is your money, do whatever you want with it.
11) When invoice is paid in full, the remaining 20%, minus the fee, is wired to your account. The fee will be determined during the conference call and will depend on different items. (I.e. projected monthly volume, size of invoices, creditworthiness of payors, etc.)
Sometimes fees are broken down to “daily rates”. This means you will only pay from the time the 80% advance hits your account to the day the invoice is paid in full by your customer. You have the ability to control the fee by not sending the invoice to the factor at time of delivery. If, for instance, the terms of the invoice are Net 30, you can hold the invoice for 15 days before funding it, thus saving 15 days worth of fees.