Factoring: Frequently Asked Questions

Q. How does accounts receivable funding work?

Simply put, accounts receivable funding is the purchase of accounts receivable from a business at a discount. It is designed for businesses that need money immediately, and can't afford to wait 30, 60, or 90 days for a customer to pay. In most cases, either the business owner can't meet his cash demand (because, for example, his customers are slow to pay or income is low due to a seasonal slowdown), or his business is growing so rapidly that its cash flow can't keep up with its growth.

Example:

When you factor your invoices, you will receive most of the invoice value (70-85%) immediately.  When a customer finally pays their invoice, you get the remainder of the invoice amount, minus a small factor fee that is based on the time it took for the invoice to be paid. The factor fee schedule is established up front in an agreement between you and the factor, then your monthly factoring process is as simple as sending a copy of each invoice to the factor as well as your customer.

Q. What type of business can take advantage of this alternative funding source?

Any business that generates an invoice and delivers a verifiable product or service qualifies.

Q. Can a business with a history of bad credit (or a new business with no credit) qualify?

Yes! Another benefit of accounts receivable funding is that it depends on your customers' creditworthiness, not yours. (And, as part of our service, we do the research to assess your customer's creditworthiness for you.)

Q. Can my business qualify if we already have existing credit lines, SBA loans or are a debtor in possession (Chapter 11)?

Yes! Our credit line complements any loan you may have or are seeking. We work with your existing lenders to enable you to access additional funding.

Q. How much will it cost me?

Liberty Funding International can work with multiple funding sources to find you the best deal. The fees will depend on the answers to the following questions:

Q. Must I agree to finance a minimum volume of future receivables?

No. Finance one invoice or as many as you need to meet your cash flow needs. Stop or continue as needed. You decide all the time.

Q. Many of my customers pay in 60 days or longer. Can I afford it?

Liberty Funding International has many solutions for you to make it affordable:

• First, you could factor just the quick paying customers since they would be your least expensive source of cash. The fees would be less and the reserves would be paid sooner.
• Secondly, you could delay the funding of invoices for 30 days so that you would only pay 30 day fees on your 60 day payers. In the process you've converted all your customers into the equivalent of 30 day payers!
• Third, use this service as a factoring credit line. Submit your invoices as you generate them, but draw advances only when and in the amounts needed. The fees will be pro-rated, i.e. you'll pay fees in proportion to the funds and the time that are used. If you take half of the normal advance, the fees will be half and you'll always be in complete control of your cash flow.

Q. How much of the invoice value do you advance?

Typically, in the 70-85% range. However, this question is relevant only to the first month.  In the second month you receive the current advance and the reserves from last months' paid invoices. After the first month you are virtually COD, so the percent of advance isn't really an issue.

Q. When I use factoring services, where does my customer send the payment and who is the payment written to?

A. The payment is mailed to the Factor, and the check is written to the Factor. The Factor is the collector of the payment.

Q. How will my customer know to send the invoice payment to the Factor?

A. When you open a factoring account, your company will send a letter to your customer identifying the factoring company and ask to accept their requests for payment on your behalf. Afterwards, the Factor will subsequently send letters to your customer asking them to redirect payment for each invoice you choose to factor.

Q. What will be the impact on my customer, and how might it change our existing relationship?

A. The only difference to your customer is where to send the payment and who the payment is made out to. In fact, your customer relationship will most likely improve with factoring services. You no longer have the uncomfortable task of collecting payment from your customers, the Factor will now assume that role as an independent third party. Now you can keep your conversations with your customers strictly about business and leave the topic of collecting payments to the Factor.

Q. How does the Factor treat my customer? How do they present themselves and communicate?

The Factor treats your customer with the utmost business professionalism and presents themselves as an accounts receivables management service that has just given your business an unlimited credit line. After all, the Factor has a vested interest in your customers satisfaction and would never want to do anything to upset them and loose their business (and yours). The Factor communicates to your customer through letters and telephone calls. The letters ask your customer to redirect invoice payments and the phone calls are only to verify the existence of an invoice. Should your customer begin to default on payments the Factor will raise the issue with you first before speaking to your customer.

Q. What happens if my customer refuses or is unable to pay an invoice that I have sold to my Factor?

It depends on what type of factoring agreement you have in place with your Factor. The two main types are Recourse and Non Recourse factoring. Most factoring companies will only do one or the other. We offer a hybrid agreement called Modified Recourse factoring, in which if the customer goes bankrupt, the Factor cannot come back to the Seller for payment and the factor carries receivables/credit insurance.

Q. What is Recourse Factoring

In the event that a Debtor does not pay the invoice, recourse factoring allows the Factor to come back to the Seller for payment. The risk of insolvency does not transfer to the Factor when an invoice is purchased. If a customer refuses or is unable to pay the invoice (due to bankruptcy), you (the Seller) must buy back the unpaid invoice or exchange it with another receivable of equal or greater value. Since Recourse Factoring offers the least amount of risk to the Factor, this factoring agreement offers the lowest fees.

Q. What is Modified Recourse Factoring

With modified recourse factoring the Factor carries receivables/credit insurance and offers protection to the seller if the customer is unable to pay the invoice due to financial failure or bankruptcy. However, if the customer refuses to pay the invoice from a dispute over quality, delivery, or specifications, the factor has recourse back to the seller's other receivables.

Q. What is Non Recourse Factoring

With Non Recourse factoring the risk of insolvency and non-payment is completely transferred to the Factoring company. If the customer goes bankrupt or refuses to pay the invoice (for whatever reason), the Factor cannot come back to the Seller for payment. This method of factoring carries more risk for the factoring company and therefore factoring fees are higher.

 
Contact us at 954-261-7654  
E-mail: info@Liberty.US.com