Factoring Company Guide
The First Stage: Client Application
Start by filling out a basic profile form we give you. This form asks for details like your company's name, address, what kind of business you run, and information about your customers.
You may also have to provide additional documents, such as an accounts receivable aging report or your customers' credit limits. This is because we, as the factoring company, want to understand the overall credit situation of your customers, beyond their history with your business.
In this initial stage, you'll also set up some fundamental financial terms with us. You need to decide how many invoices you want to factor each month (which indicates how much cash you need handy), what the advance rate and the discount rate will be, and how quickly we'll provide the advance to you.
Typically, the answers to these questions will depend on things like how financially stable your customers are, the expected monthly sales volume to be factored, the type of industry you're in, how long you've been in business, and the perceived riskiness of your customers. For example, factoring invoices for many high-risk clients will attract higher fees than a few invoices from slow-paying government agencies.
In the factoring world, volume matters a lot. The more (in terms of dollar amount) you factor, the better rates you'll get.
We'll use the profile you've completed to decide if your business is a good fit for factoring. We'll be weighing up the risks against the rewards, based on the details you've provided.
Once we approve your application, you can expect to negotiate the terms and conditions. This negotiation considers various aspects of the deal. For instance, a company factoring $10,000 can't expect as good a deal as another factoring $500,000.
During these negotiations, you'll get a clear idea of the cost to factor your accounts receivable. After reaching an agreement, the funding process starts. We'll do a background check on your customers' credit and any liens on your company. We'll also confirm that your invoice is valid before purchasing your receivables and giving you an advance.
Factoring Company Benefits
Perks of Factoring: The Inside Scoop
Is Factoring For You
The Importance of Factoring
"Without payment, a sale remains just a promise." Have you become an unintentional financier for your customers? This is an important question for your business's financial health.
A close look at your accounts receivable will reveal the extent to which you're extending credit. This is likely not what you had in mind when you set out to grow your business.
If these customers were to borrow from a bank, they'd be paying interest. In contrast, you're not earning any interest, and critically, you're missing the opportunity to reinvest that capital. This is a hidden cost that needs your attention.
Extended payment terms might seem generous, but they tie up funds that could be used to drive your business forward. It's time to consider a more effective strategy to manage your receivables.
Factoring History
Factoring History
Attention Business Owners and Entrepreneurs! Want in on a secret? It’s called factoring, and it's the financial powerhouse behind many successful businesses in America.
Here’s the shocking truth: while factoring is a goldmine, it’s rarely mentioned in business classes or in the mainstream. But in the real world, it’s freeing up billions of dollars, turning businesses into success stories.
What exactly is factoring? It’s purchasing invoices for less than they're worth – a smart move for businesses extending credit. This isn’t some modern trick; it's been around since Hammurabi’s time in ancient Mesopotamia.
Throughout history, from the Romans to American colonists, factoring was the lifesaver in tough financial times. It was the smarter, faster alternative to the slow-moving banks. And guess what? It’s still making a huge impact today.
In the current financial landscape, factoring is a big deal. From large corporations to private enterprises, it's the ace up the sleeve when banks let you down. Every year, it’s factoring that enables thousands of businesses to skyrocket by selling billions in receivables. This isn’t just finance; it’s a game-changer.
Credit Risk
Gain a Competitive Edge with Quick and Continuous Cash Flow
Expert Credit Risk Assessment Included at No Extra Cost
Accurately assessing credit risk is a critical component of our factoring business. Our objective approach sets us apart from other providers.
We act as your dedicated credit department for both new and existing customers, providing you with a distinct advantage over managing these functions internally.
Imagine a scenario where a salesperson pursues a new account with the potential for substantial purchases. In their eagerness to secure the business, they may overlook credit warning signs and bypass internal credit checks. While this might result in a sale, it offers no guarantee of payment – and without payment, there is no sale.
With us, such situations are avoided. We make credit decisions based on a comprehensive understanding of the new customer's credit situation. We do not purchase invoices from customers with poor credit ratings, mitigating the risk of nonpayment. However, please understand that our involvement does not restrict your credit flexibility or negatively impact your business beyond your control.
Ultimately, the decision to do business with a new customer of questionable creditworthiness remains yours. (Nevertheless, we reserve the right to say, ""We told you so!"")
While we may not purchase those invoices, you retain the freedom to extend credit terms as you deem appropriate. You remain in control. With our participation, you gain access to comprehensive, objective, and high-quality information that empowers you to make informed credit decisions, surpassing your previous practices.
We diligently research new clients and regularly monitor the credit ratings of your existing customers. This stands in contrast to the neglect seen in many businesses, where routine credit updates on the established customer base are scarce. Such oversight can be a significant mistake.
Typically, businesses conduct credit checks only when it's too late – when problems have already escalated. In contrast, we promptly inform you of any changes in the credit status of your existing customers.
In addition to providing specific customer credit information, you benefit from comprehensive and detailed reports on your accounts receivables as a whole. Our process includes accounting details, transactional insights, aging reports, and financial management reports. This invaluable data allows you to integrate it into your sales tracking, account history, and in-depth analysis.
With over 70 years of successful experience in managing cash flow and credit, we are eager to leverage our expertise for your benefit. Let us harness our knowledge to help you achieve your financial goals, gain a competitive edge, and ensure the continuous flow of cash for your business.
How To Change Factoring Companies
Changing Your Invoice Factoring Service Provider
Need-to-know info about switching invoice factoring firms.
Are you considering a different invoice factoring firm?
Are you dissatisfied with your current one?
Planning on ditching your current factoring firm?
What should I know before I switch factoring companies?
Here's a guide answering all these queries and more:
Understanding UCC and its role in switching factoring firms:
Usually, factoring companies file a general Uniform Commercial Code (UCC) to secure their claim over the invoices they've funded.
The UCC helps factoring companies, banks, and lenders know who's lent money on which assets. As invoices change daily, factoring companies need to file a 'blanket' UCC that secures all your receivables, even if you're only factoring a part of your sales. This 'blanket' UCC acts as a signal to other lenders, showing a Security Agreement exists between you and the factoring company.
Your specific factoring details, like rates and which accounts are factored, are laid out in the Security Agreement, which is not publicly accessible. Essentially, a UCC works like a first mortgage on your business.
The Process of Switching Companies
The lender with the earliest UCC filing gets 'First Position' on the promised collateral. For instance, a factoring firm has first rights to collect payments on your invoices.
To switch factoring firms, the new factoring firm has to pay off the old one. At the same time, the old factoring company's claim is released, and the new company's claim is filed, similar to refinancing a house.
A 'buyout' is when the new factoring firm pays off the old one using funds from your first financing.
The Buyout Agreement details the transition process and is signed by the old factoring firm, new factoring firm, and your company. In this agreement, you agree to the 'buyout figure' provided by the old factoring company.
How is the Buyout Figure Determined:
The buyout figure is usually the total outstanding receivables minus any reserves and then plus any fees owed to the old factoring firm. It's a good idea to ask for a detailed breakdown of your figure to ensure you understand if there are any early termination fees or additional charges.
What does the buyout cost?
If you can provide new invoices to the new factoring company, which they can use to pay off the outstanding invoices at your old firm, then you wouldn't incur additional costs for the switch. However, most companies need to resubmit some of the invoices already factored with the old company to the new one. In this case, the 'overlap' invoices will incur fees from both factoring firms.
How long does a buyout take?
When you're switching factoring firms, plan for the first funding to take two to three more days than the normal setup process. The extra days will be used to verify the invoices and calculate buyout figures for your approval.
What if my situation is more complex?
Although it's not usual, the old and new factoring firms can collaborate via an Intercreditor or Subordination Agreement until the old firm is paid off. Depending on the situation, factoring firms have managed to 'draw a line in the sand,' where the old firm has rights to invoices up to a certain date, and the new firm has rights to all invoices after that date.
Questions you should have asked before signing up with your current factoring firm:
- Can I use multiple factoring firms at once? The universal answer is one, according to the Uniform Commercial Code/UCC.
- If I decide to switch factoring firms, how much notice do I need to give?
- What is the penalty for leaving without giving the required notice and can you provide an example of how the fees are calculated? Beware of 13-month contracts that require a certain monthly factoring volume.
For example, a 13-month contract where you've agreed to factor $100,000 per month at a rate of 3% means you promise to pay them $3,000 per month in factoring fees or $34,000 in total over the next year. If you want to leave after 6 months, they will charge you the fees for the remaining 6 months, which equals $13,000. This can be too expensive for most companies, especially those with low profit margins. You're stuck!
