Frequently Asked Questions about Factoring
What is factoring?
Factoring accounts receivable is the selling of business to business invoices that are within payment terms in order to free up capital while waiting for payment.
How does it work?
As a Client, you send in your completed work and invoices to a Factoring Company. The Factoring Company then advances a predetermined percentage of funds against that invoice.
Why do company’s Factor?
There are many reasons companies factor. The most common reason is working capital. This working capital can be used in a multitude of ways whether it is because they are a new company needing capital to cover bills or an existing company that needs to speed up their cash flow to pay vendors or cover payroll.
How long will the application process take?
The application process can vary from company to company and funder to funder but generally factoring has one of the fastest turnarounds. Typically Factoring Companies will move as quickly as you allow them to. One of the biggest slowdowns in the process is a prospective company not providing all required documentation in a timely manner. Please keep in mind the larger a prospective company is, the longer the due diligence process may take.
What if I have outstanding loan?
A Factoring Company’s main concern is that the invoices are unencumbered or not already being used as collateral. If your receivables are already pledged as collateral, the factor will have to be able to free up enough capital to pay off the current lender or work out a pay down with the current funder.
What will my customers think, and how will they be treated?
This is one of the chief concerns that a company looks at when turning to a Factoring Company. Small to large companies factor and your customers are probably already working with Factoring Companies through other companies they do business with. The Factoring Company will work well with your clients. It is in their best interest as well, to keep your customers happy. The happier your customers are, the more invoices you will have to fund.
Do I have to sell all of my receivables?
This will vary from funder to funder. Some factors allow a selection of account debtors, others a selection of invoices, and others require all invoices and customers. It is important to make sure you are with a Factoring Company that is going to fit your needs (When you go to “Find a Factor”, please pay attention to the description sections as this will differ from funder to funder)
What kinds of companies factor?
Typically any company that works in the business to business arena can factor accounts receivables / invoices. However some industries are specialized and do better with Factoring Companies that work with that specialized industry. (When you go to “Find a Factor”, please pay attention to the specialized industries as these may better serve you)
What do factors take as collateral?
All Factoring companies will require a first line position on the invoices and need them to be unencumbered. Some factors will only take the invoices as collateral and some will a blanket on all assets (When you go to “Find a Factor”, please pay attention to the descriptions section as to who takes what collateral)
Are there any other benefits to factoring?
There are many other additional benefits to factoring accounts receivable. In addition to freeing up capital, you also get back office support that will free up you time to focus on growing your business, bookkeeping from the perspective tracking your payments, and they will check the credit on companies that you are looking to do business with to help you make the best credit decision for your company.
What are factoring companies looking for and looking at?
Factoring companies are looking at the quality of you invoices. They are making their decisions based on the quality of the paperwork, the credit quality of your clients, and the terms of payment. When submitting your invoices, a good rule of thumb is to make sure that the paperwork you submit would stand up in a court if management changed with your customer and they denied the work was complete. Factoring Companies will also look for the payment terms to be within industry standards.
What are the fees associated with factoring accounts receivables?
Each Factoring Company is different just like each company is different; some companies will have all the fees included in the administration or maintenance fee. Some companies break the fee down between the administration fee and cost of funds that is usually a prime or Libor base. Some Factoring Companies do have additional fees associated with the management of the account. (When you go to “Find a Factor”, please pay attention to the descriptions section as this will differ from funder to funder).