Financing Accounts Receivables to Get Working Capital

Invoice Factoring Companies | Factoring Accounts Receivable

So what exactly is accounts receivable factoring? Well very simply it is the process of obtaining funds by selling your company's accounts receivable. To go into a little more detail a company takes the outstanding invoices it is owed and sells them to a third party company called a factor. By doing this the company selling the invoices receives an up front payment on the invoices instead of waiting thirty or more days to be paid. When the invoice does come due the payment is sent to the factor instead of your company. Sounds great right? Well it's not all roses. If you're considering going this route you'll need to do your homework. If you don't you might pay a pretty hefty price.

Now depending on whom you talk to the accounts receivable factoring business is either the greatest thing since sliced bread or in the neighborhood of borrowing from a loan shark. Each experience is different and some companies are on the up and up while others you won't want to touch with a ten foot pole.

So you can better understand the experience we'll walk you through what happens. Now assuming you've got a factor you're intending to work with we'll start from the point of the sale. You've just finished a large project for a customer. You issue your bill to them. The first thing the factor will want to see is a signature showing that they were satisfied with the work. But let's say you sold them a product that was delivered at the dock. A receiving clerk's signature is not going to cut it. You're going to need the signature of the person that authorized the purchase to begin with. They'll need to sign the invoice and some other form of document verifying the purchase was legit and they plan on paying for it.

Next you'll need to fax those documents to the factoring company. But you can't do this from your office because you might have forged those signatures. No they need to be faxed from the customer's office. And once the factoring company does receive the documents they may still want to call and verify the purchase. Now if the purchase was for a significant amount of money all this hassle may be worth the trouble but what if the purchase was for a few hundred bucks. Not worth the trouble you say? Well we have a problem with that too.

You see when you first sign up with a factoring company they want to know what companies you do business with. And which of those you want to have the invoices factored. This is because those companies that you decide are worth factoring have to be notified that this is going to be the case. And the factor will want to run a credit check on the company. Your customers will also be notified that they must now send their payments to the factoring company instead of you. This task also will be left up to you. The quandary is this if you don't factor an invoice the company still must send the payment for it to the factoring company not to you. This will actually cause that particular payment to take longer than necessary to reach you because it will go to the factor first and they have to release it to you.

Once your invoice has been submitted to the factor from your customer's location you need to check and make sure it was actually received and there are no problems with it. After the factor receives the invoice it should only take about twenty-four hours to be approved. Most factors have a cut off time each day to receive an invoice if you want to receive your money the next day.

After the factoring company has approved the invoice you will receive a wire transfer to your bank. From there the money is yours to do as you will. Many factoring businesses would like you to believe that using accounts receivable factoring is a great way to get the money you need to grow your business. The truth is that it is not suitable for many types of businesses. Your billing methods need to be very straight forward to help make factoring work. And it helps if you issue fewer invoices but for large amounts of money. Otherwise the leg work involved can take you away from what truly matters. And that is focusing on your business.

Accounts receivable factoring pertains for the process by which smaller businesses sell invoices to become able to obtain funds these days. In this case they don't need to wait for a credit period of 30, 60, or 90 days. Thus by selling invoices smaller firms tend not to generate debt. This exercise of invoice factoring is basically employed as a finance management tool.

This practice of invoice factoring is usually adopted to avoid any loans or giving any collateral against availing any loan. The fee for invoice factoring is paid in terms of discount. This discount can ranger anywhere between 2.5% to 7%. Like a result of invoice factoring the smaller companies prevent exhibiting any loans on their balance sheets plus they also don’t have to invest any interest for the cash taken. This results in better profit figures but slightly different with buy order funding.

Several companies also assist tiny businesses in accounts receivable factoring. These companies set up the firm with the perfect factor for any distinct factoring circumstance. If a individual has an invoice or any receivable to become factored then these firms come out to assistance in the same.

These companies assist the manufacturers, distributors, importers, exporters, wholesalers, contractors, suppliers etc equivocally. They also support truckers in construction invoice factoring. These organizations assist to locate ideal aspect for any specific predicament within the area or can also aid to choose from nationwide factoring organizations to avail the finest rates. They typically customized solution as per the clients require. To avail the services of such firms firstly a form needs to become filled out stating the kind of receivables and other details required for invoice factoring. Then these companies approach the probable paying parties that avail invoice factoring. Some of these organizations assume the risk inside the deal for non-recourse factoring wherever the client isn't necessary to invest back.

You'll discover different sorts of organizations with distinct forms of rates for factoring. Any invoices or receivables towards amount of $100,000 may be factored instantly. The average rate payable for discount in such cases is 2-5%.

Some companies specialize for a particular category of invoice factoring. For instance, some companies indulge only in invoice factoring for medical business. Some firms, which cater to little and medium companies for invoice factoring, build invoices on the net and acquire immediate funding. They generally give a 24 hours turnaround. Other types of businesses also give funds to small firms for their day to day operations against collateral of their invoice or buy order. These types of organizations also buy mortgage notes, structured settlement annuity or medical receivables.

From Entrepreneur:

Say you're a young startup–growing fast, but with little-to-zero positive cash flow–and you're straining to reach the next level or just to get through the end of the month. The bank-financing drought is showing no sign of letting up, and of course credit lines are reeled in tight.

What's the answer? For a growing number of startups, it is factoring. The practice involves a financing company, or “factor,” advancing you money based on its buying your receivables at a discount; your customers pay the factor the full value later, when the bill is due. Factoring gets you cash in hand immediately–but at a steep price. Factoring fees are much higher than interest rates charged by a commercial bank. Fees are quoted by the month, so a typical 3 percent fee is actually the equivalent of a 36 percent annual interest rate.

Dealing with a factor can also be much more difficult than with a commercial bank. Banks are highly regulated, offer competitive rates and commoditized lending services, so entrepreneurs can, with few exceptions, easily anticipate the cost and terms of their loan. But factoring is very fragmented. Most factor financing is provided by smaller, unconventional lenders. It is much less regulated and the quality, reliability and integrity of factors vary widely.

The reason more startups are turning to this more expensive, risky alternative is simple: It is often the only way to get cash. And if it is the route you decide to pursue, due diligence is the single most important step. Investigate how long the factor has been in business, where its offices and headquarters are and the background of its management team. Ask for referrals from current clients, and research complaints or lawsuits using web searches, the Better Business Bureau and the state's Attorney General's Office. Also, trust your gut: If you feel you can't build trust with the factor, don't pursue the loan.

If you go forward, review your contract with a magnifying glass, particularly these points:

• What is the duration of the contract? The shorter the better–ideally, month to month. You want to switch to less expensive financing as soon as possible.
• Will the factor negotiate? Some factors allow contract negotiations while others offer only take-it-or-leave-it documents.
• Must you provide a personal guarantee? This allows the factor to go after you and your assets to be repaid. Some factors will lend without a personal guarantee or on a “non-recourse” basis.
• Will the factor take possession of your receivables if they are uncollected? Probably not, which means you'll need to collect on your own. Be prepared: If receivables are uncollected, you'll need to repay the factor's advance or you may lose financing altogether.
• How will the factor notify your customers? Ideally, the factor will create a lockbox to accept payments in care of your company. You maintain day-to-day contact with your clients so that everything appears seamless and they are not aware of your financial situation.
• Will you be required to factor 100 percent of your receivables? Cash flow and collections patterns fluctuate, and some weeks you may not need financing. If your factor requires you to finance all receivables, you will pay dearly for financing even when you don't need it. Single-invoice or spot factoring allows you to opt out.
• Is there a minimum or maximum sales requirement? Some factors require a certain sales volume. If you are not within the limits, you may lose your financing–so the fewer restrictions, the better.

Finally, always keep the end in sight. The real goal with factoring is to improve your cash flow, increase liquidity and rebuild net worth to qualify for commercial bank financing. Commercial bankers can help you figure out the financial targets that can help you re-qualify, but it is up to you to create the plan.

As a commercial lender, I have seen businesses resort to factor financing for one or two years at the most. If the company still didn't qualify for bank financing at that point, chances are, it was already out of business.

From Entrepreneur:

Say you're a young startup–growing fast, but with little-to-zero positive cash flow–and you're straining to reach the next level or just to get through the end of the month. The bank-financing drought is showing no sign of letting up, and of course credit lines are reeled in tight.

What's the answer? For a growing number of startups, it is factoring. The practice involves a financing company, or “factor,” advancing you money based on its buying your receivables at a discount; your customers pay the factor the full value later, when the bill is due. Factoring gets you cash in hand immediately–but at a steep price. Factoring fees are much higher than interest rates charged by a commercial bank. Fees are quoted by the month, so a typical 3 percent fee is actually the equivalent of a 36 percent annual interest rate.

Dealing with a factor can also be much more difficult than with a commercial bank. Banks are highly regulated, offer competitive rates and commoditized lending services, so entrepreneurs can, with few exceptions, easily anticipate the cost and terms of their loan. But factoring is very fragmented. Most factor financing is provided by smaller, unconventional lenders. It is much less regulated and the quality, reliability and integrity of factors vary widely.

The reason more startups are turning to this more expensive, risky alternative is simple: It is often the only way to get cash. And if it is the route you decide to pursue, due diligence is the single most important step. Investigate how long the factor has been in business, where its offices and headquarters are and the background of its management team. Ask for referrals from current clients, and research complaints or lawsuits using web searches, the Better Business Bureau and the state's Attorney General's Office. Also, trust your gut: If you feel you can't build trust with the factor, don't pursue the loan.

If you go forward, review your contract with a magnifying glass, particularly these points:

• What is the duration of the contract? The shorter the better–ideally, month to month. You want to switch to less expensive financing as soon as possible.
• Will the factor negotiate? Some factors allow contract negotiations while others offer only take-it-or-leave-it documents.
• Must you provide a personal guarantee? This allows the factor to go after you and your assets to be repaid. Some factors will lend without a personal guarantee or on a “non-recourse” basis.
• Will the factor take possession of your receivables if they are uncollected? Probably not, which means you'll need to collect on your own. Be prepared: If receivables are uncollected, you'll need to repay the factor's advance or you may lose financing altogether.
• How will the factor notify your customers? Ideally, the factor will create a lockbox to accept payments in care of your company. You maintain day-to-day contact with your clients so that everything appears seamless and they are not aware of your financial situation.
• Will you be required to factor 100 percent of your receivables? Cash flow and collections patterns fluctuate, and some weeks you may not need financing. If your factor requires you to finance all receivables, you will pay dearly for financing even when you don't need it. Single-invoice or spot factoring allows you to opt out.
• Is there a minimum or maximum sales requirement? Some factors require a certain sales volume. If you are not within the limits, you may lose your financing–so the fewer restrictions, the better.

Finally, always keep the end in sight. The real goal with factoring is to improve your cash flow, increase liquidity and rebuild net worth to qualify for commercial bank financing. Commercial bankers can help you figure out the financial targets that can help you re-qualify, but it is up to you to create the plan.

As a commercial lender, I have seen businesses resort to factor financing for one or two years at the most. If the company still didn't qualify for bank financing at that point, chances are, it was already out of business.

Working Capital via factoring continues to be a viable solution for Canadian business owners and financial managers. The process at first glance is quite simple – your firm 'sells' its invoices to generate immediate same day cash for those invoice assets.

Clients ask us how this is different from a bank operating line of credit based on receivables. Simply speaking the difference is simply the method in which the asset – the receivables, is secured. In a Canadian chartered banking type arrangement your receivables are 'assigned ', not 'sold' to the bank. The bank holds that assignment as a security for their advances on your receivables – they do not call the security unless your firm defaults on its obligations with the bank.

For those firms that can achieve bank operating line of credit financing in Canada that solution is absolutely the most cost effective – yet in many instances Canadian firms cannot achieve the amount of credit they need because the receivables financing is closely tied to your balance sheet and income statement from a credit perspective .

The majority of factoring ( also known as invoice discounting ) in Canada is done on a recourse basis, which simply means that although you get immediate cash for your receivables you are still responsible for any bad debts relative to your customer base .

In Canada most of factoring is done via a U.S. based model of doing business, which has the factor firm essentially verifying and collecting those invoices from your customers. We advise our clients on an alternative method, known as non notification factoring. This type of facility, which we term as a working capital facility, allows you to bill and collect your own receivables and avoid some of the negative stigma that Canadian business owners attach to factoring.

Factoring should most often be considered when your business is growing quickly or has large orders from generally credit worthy customers. Your ability to turn your receivables over more quickly will lead to more sales and greater profits. The cost of factoring is significantly higher than bank financing, but your ability to make use of the cash flow to buy smarter, take advantage of discounts, and purchase and resell more inventory faster significantly offsets a very large part of the cost of factoring in Canada, which can range anywhere from 1-3% on a monthly basis . We caution clients to view this cost as an operating expense as opposed to a financing or interest charge, which allow them to much better rationalize moving to this type of working capital facility.

In summary, factoring is an alternative to bank receivables financing. The facility, when properly set up, allows you to immediately monetize a large asset, your receivables. The best type of facility in Canada, in our opinion, is the non-notification type facility, allowing you to cash flow your receivables similar to a banking arrangement. When properly utilized the facility can help you grow and profit from faster working capital turnover.

factoring funding

Accounts Receivable Factoring is really a technique of increase the amount of cash for the company. The companies that is going to be capable to do this are the ones that are business to business. Should you don't do this, then you will not be able to have your invoices factored. Factoring is really a way of discounting your invoices and selling them to investors or factoring businesses. Some variables will figure out the factoring fee that you will have to pay for invoice factoring, but usually the fees will be low.

From Yahoo:

“The Royal Bank of Scotland Group plc has agreed the sale of RBS Factor SA to GE Capital,” the bank said in a statement. Factoring is the procedure whereby cash is advanced to businesses, as a proportion of revenue from invoices issued. The debt is reassigned to the factoring organization, which enables them to collect it. RBS, which had sold already its German factoring division to GE Capital in March, did not disclose how much is going to be paid. Both deals are subject to regulatory approval and expected to complete by the third quarter of 2010. RBS added: “As part of the group's strategic plan, announced in February 2009, this company was placed within the non-core division while the group sought a new owner having a long term commitment to the factoring sector in France.”

The Factoring Buiness is certainly large. If there are sufficient margins to account for the factoring fees, then this can take your company to the next level. Increasing the bottom line and giving your business the growth that it is asking for is one of the greatest things which you can do for your organization. Definitely look into getting your invoices factored so which you always appear at your options.

There are a number of business to business firms out there which could make use of improvements on cash flow. Often times, several organizations will have invoices dated anywhere from 30 to 90 days. During this time period, the business has sold the service or product, and it is waiting around to get paid.

To get cash right away as opposed to waiting for the client to pay, you can get your accounts receivables factored. Many people call it invoice factoring, and others may say that it's invoice discounting. Either way, it is actually the same end result. You are going to be selling your invoices to a company for a discounted price. This discounted rate will usually be anywhere between 1 and 6 pct. Instead of looking at the credit rating of your business, the factoring or financing company are going to be looking at the credit rating of the customer. They'll also check out various other info before cutting you a check. Just how much that they'll provide you with up front will also fluctuate. A great example, they might give you 80% of the particular value of the invoice.

When the customer pays, they will pay out the remainder of the money, subtracting their costs. This can help plenty of businesses out there. It is possible to help increase your working money as well as help boost the growth of the company. Naturally, if the company does not have enough margins to handle the costs of having your accounts financed, then this business financing model certainly won't work out. The great thing is the fact that this strategy can help out plenty of businesses. factoring program and RBS Financing are good information sources.

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