Is the outcome worth it?


Your company will be able to offer credit to your customers making you a more "competitive supplier". Your company will now be in a better position to receive orders from customers on a regular basis.  Selling your invoices essentially fills in the "money gap" between the time a company makes a sale and the time the customer pays. 


Your company will be able to produce the orders on a timely basis, while increasing its sales and profit, all for a nominal fee. Repeat this scenario
over and over that equates to growth, growth, growth, profit, profit, profit!   

Can your company wait to receive payments due and still meet payroll expenses, rent, or operating expenses buy supplies and fill "repeat" and "new" incoming orders. Selling your invoices gives you access to needed cash - YOUR CASH - within a few days instead of a few months!!!

How does financing receivables differ from a bank loan?

Banks must consider the amount of assets a business (collateral) has in securing a loan normally requiring a great deal of assets as collateral.  As an example if a business has $200K worth of outstanding invoices, they may lend 30-50 percent of the total amount, ($60-100,000).  And even then, a bank may still not be willing to make a loan unless the business has a strong financial statement independent from the accounts receivable.   

A funding source, on the other hand, does not loan money.They make an outright purchase of your invoices.They do not advance funds based on the company's collateral (strength of the business), but on the strength of the company's customers.  Funding sources can advance up to 90% or more of the business's accounts receivable.

	Factoring	Bank Loan	Federal Program	Private Investor	Venture Capital	Going Public
Simple Application	Yes	No	No	Varies	No	No
Give Up Control	No	No	Possibly	Possibly	Yes	Yes to Board of Directors
Give Up Equity	No	No	No	Yes	Yes	Yes
Approval Based on Credit Score	No	Yes	Yes	Yes	Yes	Yes
Days To Fund	3 to 10 Days	60 to 180 Days	60 to 180 Days	15 to 90 Days	30 to 90 Days	120 to 270 Days
Requires Personal Guarantees	No	Yes	Possibly	No	No	No
Funding Tied to Sales	Yes	No	No	No	No	No
Requires Profitability	No	Yes	Yes	Usually	Yes	Yes
Limited to Asset Value	No	Yes	Yes	Possibly	No	No
On-Going Monitoring	No	Yes	Yes	Yes	Yes	Yes
Reduce Overhead	Yes	No (loan to payback)	No (Loan to payback)	No (Dividends)	No (Loan to pay back or Dividends)	No (Dividends)

 

More about factoring

The origin of the factoring industry has been traced to the days of the Roman Empire or even earlier, but the industry as we know it today in the United States goes back only about 200 years to the early nineteenth century.

Factors evolved from U.S. selling agents for European textile mills. The European mills used the agents to sell their fabrics in the U.S. and paid the agents a commission on sales. The agents also warehoused merchandise and did the shipping for their European clients. As these selling agents prospered and became more familiar with their own customers, they began taking on the job of establishing credit terms and advancing funds to the European mills. The oldest documented factoring firm traced its roots to 1810 and several others were established in the first half of the nineteenth century.

Traditional or old-line factoring is fairly straightforward and is designed for long-term relationships. It involves the purchase of receivables without recourse and with notification to the client's customer. The factor buys the receivables created by a client's sales and then collects the proceeds directly from the client's customer. After the factor buys a receivable, it assumes the credit risk on that receivable. If the client's customer doesn't pay because of a credit problem, the factor must assume the loss.

Essentially, an old-line factor offers its clients credit protection, collection, bookkeeping services and financing. In addition to advances against receivables purchased, once a relationship is established, factors often provide clients with over-advances during peak shipping seasons. Factors also offer financing services and accommodations such as inventory loans, letters of credit/import financing and equipment financing. Export financing is also available through alliances with international factoring networks. Principally because credit guarantees are important in textiles and apparel and because of factoring's roots in the textile industry, about 70 percent of the volume of old-line factors is still in textiles, apparel and related industries.

Since the factor takes the credit risk on the sale, it must first approve the sale through its credit department. Thus, the client is relieved of the cost of running a credit department. Because of the credit guarantee, old-line factoring is limited to industries in which credit information is available. The charge for the credit and collection service, called the factoring commission, varies with the sales volume of the client, the size of the transactions and competitive conditions.

The economic rationale for the factoring service is fairly obvious. With thousands of suppliers selling to the same customer, without factoring, each seller would have to do its own credit appraisals and collections. This involves an incredible duplication of effort. With factoring, a single credit department operating for hundreds or thousands of suppliers, eliminates much of the duplication and promotes efficiency. And with the aid of electronic data processing, the cost of the credit and collection operation has been reduced exponentially and the savings are passed on to the client. Technology has revolutionized the industry, eliminating tons of paperwork and providing clients with valuable on-line information. The system can generate a host of reports on sales analysis and other information to help a client analyze its own business.

It should be noted that the factor's guarantee, is a credit guarantee and does not apply to anything other than the financial inability of the client's customer to pay. The guarantee does not apply to merchandise disputes between the buyer and the seller. If the receivable is not paid because of buyer claims of defective merchandise or untimely delivery or any other dispute involving the merchandise or its delivery, the factor will look to the client (the seller) for reimbursement.

The credit and collection service is just half of the business of the old line factor. The other half, and for many clients, the more important half, involves advances of funds against the purchased receivables. If the customer wants a cash advance, it can borrow from the factor. The interest on the loan is in addition to the commission and is usually at a rate competitive with the cost of a comparable bank loan.

Many factoring clients are maturity or non-borrowing clients. They wait until the purchased receivables are paid and then may collect the proceeds from the factor. If the client leaves the funds with the factor after collection, the factor will pay interest on the balances at a rate comparable with the factors' cost of funds. These balances may be drawn upon when needed.

Traditionally, factoring was done on a notification basis. The client's customer is notified that the account has been turned over to a factor and the customer's payment should be made directly to the factor. However, a non-notification agreement can be worked out. The factor would still purchase the receivables outright after doing the normal credit check of the customer, but the customer wouldn't be notified that its account has been sold. If the client borrows money, customer payments in non-notification accounts are usually sent to lock-boxes which the factor administers.

Aside from old-line factoring, there are as many variations on factoring as there are entrepreneurs who choose to use the name. There are commercial finance companies, some of which call themselves factors, single-invoice factors, purchase order factors, recourse factors, invoice discounters and re-factors.

Commercial finance companies do not provide credit guarantees, but lend against collateral, principally receivables and inventory, and are an offshoot of the factoring industry and go back to the beginning of the twentieth century. Largely because the commercial finance companies operate in diverse industries in contrast with traditional factoring which is still largely married to textiles and apparel because of the need for credit guarantees in those industries, it has grown much more rapidly than traditional factoring. Rather than purchasing receivables, commercial finance companies take assignments of receivables as collateral for loans. The client collects the receivables proceeds and uses the funds to pay down the loan. Defaulted receivables are the client's problem (but could be the lender's problem if defaults are substantial). The lender normally provides enough of a cushion so that if the client fails to repay the loan, the collateral can be liquidated and provide full payment.

Single-invoice factors provide essentially the same services as the old-line factors but they do it one invoice at a time. Also, there are very few non-borrowing clients for single-invoice factoring because a company that factors a single invoice usually is motivated by the need for financing.

While factors finance receivables after they are created, purchase-order factors provide financing so clients can fill orders that they cannot finance on their own. Once the order is filled and is converted to a receivable, a traditional factor might purchase the receivable and cash out the purchase order factor.

Recourse factors are usually small factoring companies that purchase receivables often in non-traditional industries where credit information is not readily available. They buy the receivables but those that are unpaid are charged back to the client.

Invoice discounting is similar to the recourse factoring and is prevalent in England and some other European countries. The invoice discounter buys receivables, but rather than focusing on the credit worthiness of the client's customer, they concentrate on whether the contract creating the receivable allows sale or assignment. Non-paying receivables are charged back to the client.

Re-factors provide the same services as old-line factors, but they work with small companies, sometimes with sales volume as low as $500,000 (generally large factors need at least $3 million in volume). The re-factors provide the financing, but use the services of traditional factors to handle the credit checking and credit guarantees. They make their money from interest on money advanced and a spread between the re-factors commission cost and what it charges its own clients.                               

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