Understanding Invoice Factoring and how it works can change the path of your small Business. Factoring has been practiced for centuries. The Romans sold promissory notes at a discount as did the Phenicians. The word "factor" comes from Latin, the language of Rome. It means "to do" or "to make." The Pilgrim's journeys to America were financed by advances from a Factor who provided the funds to pay for the journey. The Pilgrims repaid the money with earnings from America. Factoring to this day is an extremely common business practice in Europe whereas many American business men have never heard of it. This year alone thousands of businesses will Factor billions of dollars in accounts receivable, and they are doing it for profit, growth, and in some cases, their very survival.
Factoring is the selling of your accounts receivable for cash versus waiting 30-60 or 90 days to be paid by your customer.
Q: What Is A Factoring Company?
A: A commercial finance company that specializes in the purchase of invoices or accounts receivable for cash.
Q: How do I find a Factoring Company?
A: You could "Google" the word "factoring", however you may not know what companies are best for you. You could ask you Banker, chances are he / she has only one company to refer you to OR you can contact a Receivable Broker or an Invoice Line of Credit Broker or a Cash Flow Consultant. A good (opinion) Broker will not charge you Fees. The Lenders pays the Broker's fees and most Lenders want a Broker to work only with their company. This is great
if their company can provide what each client needs. Many Factoring companies do not factor construction or medical
invoices. Other Factoring companies require long-term contract. Some Factoring companies can factor up to $ 10 Million per invoice, a few can factor the large Government Contracts up to $ 100 Million and still others won't factor anything less then $ 10,000. One Factoring Company does not fit all Businesses. Clients need a choice, unless of course, the choices are few because of the type of Factoring needed. A good Broker will provide more then one introduction to a Licensed Financial Institution who meet strict standards for providing Accounts Receivable Funding for Government, State, City, County and Business Invoices. A really good Broker will stay with you mentally and emotionally during your entire transaction.
Q: How does factoring differ from bank funding?
A: Factoring companies make decisions based on the credit-worthiness of your customers; a bank makes credit decisions based on your company's financial history, cash flow and collateral. Because factoring is not a loan, no liability appears on your balance sheet. Most importantly, Factoring companies make funding decisions in days or hours-while banks generally take weeks or even months.
Q: Why would a company sell accounts receivable?
A: Companies with recurring cash-flow problems often can't afford to wait 30, 60 or even 90 days for invoice payment. They need cash to meet immediate financial demands of their business. Factoring provides this cash by funding the purchase of accounts receivable, often within 24 hours after invoices are created.
Q: What is the major benefit of factoring?
A: You receive immediate cash. Also-perhaps most importantly-Decision to finance your company is based on your
customers' credit-worthiness instead of your balance sheet. If you can deliver the goods and services you have promised to your customers, and if your customers have good credit, you can factor your invoices no matter how limited or problematic your company's financial history.
Q: What does factoring cost?
A: Rates are based on individual and specific circumstances. Factoring rates depend on the credit-worthiness of your customers, your average invoice, average payment cycle, factoring volume and other elements. In general, they would have you believe that cost of factoring is outweighed by its significant benefits: access to immediate cash, credit analysis of your clients, collection work and accounts-receivable reporting.
Bottom Line is, factoring cost and fees are Tax Deductible. Every dime you spend in factoring can be deducted as a business expense. For this reason, factoring can be a good idea.