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Learning Center - Invoice Factoring Information
What is Factoring
Factoring is the sale of commercial accounts receivable invoices to a buyer, or factor, at a discount, in order to obtain cash on the invoices, with the factor assuming full responsibility for credit analysis, payment collection and credit losses on the new accounts. There are usually three parties involved when an invoice is factored: the seller of the product or service who originates the invoice, the debtor is the recipient of the invoice for services rendered who promises to pay the balance within the agreed payment terms, and the factor.
FAQ
Q: How much does it cost to Factor Invoices?
A: Our fees are determined by the amount financed,
average invoice size and collection time. All
fees are clearly stated in your agreement; there
are no hidden charges.
Q: What types of receivables can be factored?
A: Just about any verifiable invoice for services
rendered or products delivered, due from a creditworthy
company can be used to factor invoices.
Q: Do we bill on our letterhead or the factor’s
letterhead?
A: You continue to bill your invoice on your company
letterhead, but the payments must be remitted
to our address.
Q: Must I agree to finance a minimum volume
of future receivables?
A: No. Finance as you need it. Stop when you wish
and continue as needed.
Q: What will my customers think?
A: Factoring Invoices is used by many of the largest
corporations in the world. Many of our existing
customers do business with companies such as Exxon,
Mobil, Wal-Mart, General Motors and many Fortune
500 companies. Factoring is a widely accepted
method of business financing and has never created
a problem for any of our customers.
Q: How long does it take to get approved
for Invoice factoring?
A: Once all the information is received, decisions
are made quickly, eliminating long waits for loan
committee approval. The quicker we receive preliminary
information on your company, the quicker we can
submit a proposal for your consideration and help
you start factoring invoices.
Factoring Benefits
The benefits a company can realize through this funding approach are many.
Just To Name A Few:
- Avoid the loss of business to competitors who are better financed
- Spend less time managing your receivables and more time managing your business
- Get cash for your invoices within 24 hours
- Stabilize cash flow
- Take advantage of purchase discounts
- Stop worrying about meeting payroll at the last minute
- Improve your company's credit status
- Pay off loans and other debts
- Meet seasonal demands
- Offer better credit terms to your customers
- Your "Line of Credit" grows as your business grows
- Purchase inventory sooner and fill orders faster
- Fund marketing efforts to grow your business
- Reinvest in your business
- Quick, simple & straightforward
PROFITABLE COMPARISON |
||
| Currently |
With
Factoring |
|
| Annual Sales | $1,000,000 |
$2,000,000 |
| 20% Gross Profit | $200,000 |
$400,000 |
| Overhead | $60,000 |
$80,000 |
| Cost of Factoring | N/A |
$60,000 |
| Net Profit | $140,000 |
$260,000 |
Factoring vs. Bank Financing
Where do you go after the Bank says "NO"? Friends? Relatives? Customers? Credit Cards? Not likely. Banks are generally looking for a borrower's ability to repay a loan based on the company's cash flow or individual borrower's income and assets. Generally, banks are looking for the following criteria to grant a loan or line of credit:
Factoring, as an alternative source of financing your company's growth, eliminates many of the Bank's criteria that are difficult to meet. Further, assuming you can get a loan for the initial start up capital or for ongoing operations, what are you going to do after you've spent those funds? You are still going to be waiting for the invoices to be paid. The biggest problem with bank financing or financing via your credit cards is that once you've reached your maximum credit limit, you're stuck and out of luck. Where as banks lend primarily based on cash flow and collateral (your ability to repay the loan) and establish an absolute maximum they will lend you, Factors provide cash based on the quality and liquidity of your assets... primarily your accounts receivable. Factors primarily look at the quality of your accounts (the credit worthiness of your customers and the validity of your invoices) which allow them to provide financing even if your company is new, or your credit history is weak, or if your cash flow is a little slow. Because each account is evaluated individually, a Factor has much more flexibility than a Bank when it comes to keeping up with an increase in sales. Here's how factoring differs from traditional bank loans:
Types of Factoring
Who uses Factoring
Any business that invoices customers for payment can use factoring services. It is a significant source of financing for many companies that depend on fast billing turnaround, such as hardware stores, pharmacies, dry cleaners, florists, and wine and liquor distributors. Service industries such as temp agencies, security guard services, and trucking companies also use factoring services to meet payroll deadlines or simply improve cash flow as needed.Factoring is also a valuable resource for businesses like garment companies and textile businesses that traditionally have a hard time securing loans. By factoring their accounts receivable, they can purchase raw materials or make other investments to grow their businesses.
The typical factoring service candidate has $5 million to $10 million in annual sales and $25,000 to $100,000 in accounts receivable every 30 to 60 days. But most factors will work with any company meeting a monthly minimum of $5,000 to $10,000 in invoices.
Businesses with less than $5,000 in accounts receivable may find a factor willing to work with them, but are likely to have to pay more for their services. You may want to consider a small business loan or low-interest credit card if you have less than $5,000 in monthly invoice value.
Factoring Process
You will need Adobe Acrobat Reader to view sample reports.
| Step 1 - Submit Invoice Example: $10,000 |
|
| Step 2 - Once verified, Commercial Capital Lending (CCL) advances 80% of Invoice amount to Client Example: 80% of $10,00 = $8,000 paid to client |
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| Step 3 - Client’s customer pays invoice directly to CCL’s address |  View Larger Image |
| Step 4 - CCL recovers its advance and pays the difference (Reserve) less the fee (2%**) to the Client Example: $10,000 Invoice - 8,000 Advance 2,000 Reserve - 200 Fee $1,800 Reserve paid to client Total to client: $8000.00 + $1800.00 Total = $9800.00 |
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| Step 5 - Client nets 98% of invoice but receives 80% of invoice 24 hours after the invoice is verified and approved | View Larger Image |
| Step 6 - CCL provides many on-line, user-friendly management reports to its Clients, including account summary statements, reserve reports, detailed aging reports, etc. |