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Invoice factoring can improve a company's market share,
profitability, and growth rate by turning an unproductive asset (accounts
receivable) into cash. The infusion of cash flow that factoring provides can be just what is needed to get a firm on track to acquire new
contracts, make timely payments to vendors, or even cover payroll. But
the company owner should understand how factoring works
and know what is needed to facilitate the onset of the relationship. Answering the following questions should provide a guide for the company that is considering utilizing factoring.
Is the company a good fit for factoring?
Accounts
receivable factoirng is based on amounts owed by other business on credit. In other words, factoring companies will not be able to
advance funds for amounts due from individuals. In addition, the
business customers must have a good credit history. Since the factor is advancing cash to the client and the only
collateral they have is the company's receivables, they must perform
due diligence by checking the credit history of each customer. If
several of the customers have poor credit ratings and are slow payers,
the factoring company may be hesitant to take on this client. They may perceive the risk as being too great.
It
is also important for the business to achieve a reasonable profit
margin in order to cover the factoring fees. Despite the many
advantages that invoice factoring offers, the fees can range anywhere
from 2.5% to 4% per month for invoice amounts submitted. Therefore,
the business should enjoy a profit margin of at least 10% to be able to
justify the fees incurred.
Are there any liens on the receivables?
Many
business owners don't know the answer to this question and it should be
determined immediately in order to save time during the application
process. Factoring companies must have a clear title to the
receivables in order to offer themselves protection in the event of
bankruptcy or other situation in which they are not receiving
payments. To do so, they make what is called a UCC filing
which gives them the ability to receive a first position on the
receivables. If there is a lien, factoring companies often work with
the lienholder to get it released. For example, if the company has a
term loan with a bank which required all assets of the company to be
pledged as collateral, the factoring company could make payments from
the initial fundings to pay down the loan and get the lien released.
The same is true if the company has fallen behind on their 941 tax
payments and the IRS has filed a lien.
Which factoring company is the best fit for my business?
Type
"factoring companies" into the Google search box and you will see
plenty of choices avaiable. Which one should you pick? It depends on
so many factors. Some are adept at factoring freight bill invoices
while others focus on staffing companies. Some of the bigger ones may
work with all types of business, but exclude the medical and
construction industries. Factoring companies also vary in the amount
of minimum or maximum monthly volume that is requred, while others
allow "spot" factoring. Spot factoring allows companies to submit
invoices only when needed. The contracts vary as well. Some factors
may offer what appears to be a good rate, but severely penalize the
client when they try to end the relationship. It can be very confusing.
Utilizing
a well-educated factoring broker is an excellent way to find the right
fit for the company's situation. A factoring broker knows the factors
that are reputable and will service the account in a professional
manner. They will also serve as an advocate for the client by helping
address issues and expediting the application process. Brokers are an
integral part of the factoring process and the best thing is the
company does not have to pay them because they receive their
compensation from the factoring company. |
Invoice factoring companies don't require their clients to pledge
collateral other than their accounts receivable. Because of this, it
is critical for the factor to feel extremely confident that they will
be "paid back" by the customer of the client. Progress billings, which
are typically present in construction relationships, are usually not
compatible with 
Invoice factoring accounts for hundreds of
billions of dollars in transactions each year. Although many business
owners aren't aware that they can receive instant working capital by
monetizing their accounts receivable through factoring, it is commonly
used as an alternative to traditional bank loans. Unfortunately, there are unscrupulous and desperate
individuals who try to manipulate and 
Accounts receivable factoring can give businesses a shot in the arm by
providing much-needed working capital. The purpose of this article is
to explain how the factoring process works and what types of businesses
qualify for this type of financing. Although factoring is a very flexible was to accelerate a company's cash flow, there are some guidelines that must be followed.
When a business owner wishes to engage in an invoice factoring relationship, the factoring company performs due diligence to insure that the potential client is a good fit. One facet of this process is a lien search, which gives the factor adequate assurances that they will have clear title to the client's receivables. This is critical, as the factoring company will be advancing sizable funds to the client.