· In the world of finance, factoring is a transaction in
which a business sells its account receivables to a third party--called a
"factor"--in return for immediate cash, generally working capital to
expand the business. The accounts receivables are sold at a discount.
Although commonly called a loan, factoring isn't a loan at all; it's the
purchase of an asset. Factoring has been used by businesses for more
than four centuries.
Why Do Businesses Engage in Factoring?
Businesses engage in factoring because it's a simple way to get money
without having to prove credit worthiness, which in tough economic times
can be difficult. Factoring is easier and faster than getting a bank
loan, with no requirements for a bank statement or a business plan.
Factoring also lets business owners dispense with accounts receivables,
which have long been among the biggest sources of frustration to many
business executives. They sell someone a product or service but have to
wait weeks or even months to get paid. And there's always the risk that
the account won't pay.
A factor provides immediate cash. You take
your receivables to the factor and get an advance payment of between 70
percent and 90 percent of the total. After charging a small
fee--generally 2 percent or 3 percent--the factor releases the rest of
the funds once the receivables have been fully paid. This helps a
business with its cash flow and allows it to continue to make
investments in its operations and, hopefully, grow.
As a general
rule, the discount rate--the fee the business pays the factor--is in
proportion to the age of the receivable. The lower the age, the lower
the fee. Most factors won't accept accounts receivables older than 90
The following are key reasons why a business would choose to go to a factor:
-Obtain a source of working capital
-Relief from responsibility for collection of no-pay and slow-pay clients
-Fill more orders
-Flexible funding program that increases as you increase your sales
-Ability to take advantage of vendor discounts
-To have funds for payroll and taxes
-Extend credit to customers on large orders
-Buy equipment or inventory on demand
The Potential Downside
- Factoring isn't without its drawbacks. Among them is the fee and
subsequent charges, which could over the long run add up to a lot more
than the cost of a conventional bank loan or line of credit. The
factor, too, faces a fair number of risks, including fraud (fake
invoices) and bad debt from the purchased accounts receivables.
Q: What is factoring? How does it work?
Factoring is the purchase of accounts receivable for immediate cash.
Once you have delivered a product or performed a service for a
creditworthy corporation or institution, make contact with Factor prior
to sending your invoice to your customer. Underwriters will confirm with
your customer that the work has been completed or the goods delivered
and accepted, you can be advanced up to 70% - 90% (up to 60% for the
construction industry) of the face value of the invoice amount in cash.
When your customer pays, you will receive the balance less the discount.
Q: Do I need accounts receivable financing?
Yes...if you are a new business. YES...if you are a business that can't
get traditional financing, such as a small or medium size business or a
minority or woman owned business. YES...if you need additional operating
capital. YES...if you want to solve your cash flow problems.
Q: How do I qualify?
A credit decision is based on the strength of your customers, not you.
It's easy to qualify if you meet the following criteria: Your customer
must be another (creditworthy) business. Your invoice must be a valid
one for goods sold and delivered or services rendered...to your
customer's satisfaction. Each invoice will be verified with your
Q: What does it cost?
A: The discount
fee ranges from 3 - 5% and is determined by the number of days that
elapse from the day funds are advanced to you until the day invoice is
paid back by your customer. And, the fee is earned only after the
payment has been collected on an invoice..not before.
Q: How will I know which invoices are paid and which are not?
You will have your own account executive to work with, whom you can
call at any time for updated information. Just request an "Aging
Schedule" which will show you which invoices have been paid and which
Q: How fast can I get money?
many states it takes as little as one week (or less) to get on-line.
Once on-line, the you can be funded on your invoices within 24 hours
(once in receipt of verification of your invoices).
Asset based lending techniques, such as factoring loans, give you the funds you need to expand your business with ease.
the peace of mind you’ll gain by eliminating your cash flow worries. MP
Star Financial gives you access to the funds you need via invoice
factoring (also known as asset based lending, factoring loans or
There are many reasons to investigate
receivables factoring. If your new business is growing rapidly,
traditional banks offering $50,000 lines of credit don’t help when what
you really need is $250,000. Asset based lending methods, like invoice
factoring, fit into your business model by giving you the money you need
to keep your business moving forward. With Factoring you'll benefit
Immediate Cash: Get quick cash from receivables factoring of your eligible accounts at any time.
Funding for New Companies:
We understand how small businesses can struggle financially. Factoring
loans can be the ideal solution allowing you to leverage your customer’s
credit to build your own business.
When you choose invoice factoring, you’ll have access to the necessary
cash flow to fund new business. Unlike traditional lines of credit,
which place a value on your company based on today's sales (and can
stunt your business growth), factoring loans are designed to help with
your continued business development.
It can be tough when customers continually find ways to extend payment
beyond 30, 60 & 90 days. While you’re confident the invoices will be
paid, your customers may be outsourcing their accounts payable
departments to India, or mailing your checks to the other coast in order
to mail them back to you to play the float. Invoice factoring enables
you to extend your receivable terms to land the big accounts.
Time is money- and chasing down unpaid invoices can be very
time-consuming. With receivables factoring you’ll get regular reports
about your accounts receivable, as well as problem solving assistance.
Early Payment Discounts:
Your customers are regularly taking advantage of the "two ten, net 30"
terms that you offer. Why shouldn’t you? Receivables factoring gives you
the cash you need to take those discounts and enhance the bottom line.
Build Your Credit:
With factoring loans and asset based lending your company will have the
cash flow to pay its bills in a timely fashion-ultimately building its
credit score, which allows you to leverage your suppliers for better
Grow your business with the help of asset based lending methods, like factoring loans.
of today’s industry titans began with the help of asset based lending
and factoring loans. Now you can too! Call it invoice factoring,
factoring loans or receivables factoring, asset based lending is
available to help you grow your business with ease.
Invoice Factoring Terminology
is an unsecured debt that is due and payable from a customer to the
client. It usually is made up of an invoice and supporting documentation
as proof of service, delivery and/or acceptance on the part of the
are multiple account receivable from many different customers to the client.
, also referred to as an
is a group of invoice(s) and supporting documentation accompanied by an
assignment that the client sends to the factor to be funded.
, also referred to as the
is the percentage of the invoice that is actually advanced to the
client on each invoice. For example, if the advance request is for
$10,000 and the advance rate is 80% then the amount advanced would be
$8000 less the initial fee.
form stating that the invoices and the supporting documentation making
up an advance are for work that has been completed and the invoices are
valid and will be paid in full to the factor.
is the person or company that provides operating capital by purchasing eligible accounts receivable
, also referred to as the
, is you - the provider of goods and/or services
, also referred to as the
, is the company that purchases the goods and/or services.
is the process in which the Factor reviews your application and the
supporting documentation in order to approve you as a client
, also referred to as the
is the fee charged by the Factor on each invoice making up an advance.
The initial fee is a fixed percent of each invoice for the initial fee
period for which each invoice is outstanding.
‘initial fee period’
is the length of time for which the initial fee is charged. Although it
may vary the length of time corresponds with the terms of the
receivable. If the terms are Net 30 days then the Initial Fee Period is
is the bill(s)
documenting the goods and/or services provided to the customer. Combined
with the proper supporting documentation it makes up an account
is the fee charged by
the factor for each late period for which an account receivable is
outstanding beyond the initial fee period.
‘late fee period’
is the length of time or any portion thereof for which a late fee is
charged. If the initial period is 30 days and the late fee period is 15
days and an accounts receivable goes unpaid for 60 days then the total
fee will equal the initial fee plus two late fees.
is a PO Box maintained by the factor at the factor’s bank to expedite
the collection and processing of payments sent by customers to pay
invoices. All payments of invoices are directed to the lockbox.
is the amount of outstanding invoices that are older than the recourse period and must be repurchased by the client
the length of time in which factor will fund a purchased account
receivable before the factor will return a non-performing or unpaid
account receivable to the client.
is the amount of the account receivable that is not advanced to the
client and is held in escrow until the account receivable is paid in
full. The balance on this account is paid to the client on a regular
basis and represents collections on account(s) receivable.
COLLECTIONS - ADVANCES - FEES - RECOURSE = RESERVE
is the document(s) that make invoice(s) accounts receivable ( i.e.
proof of delivery, time cards, acceptance signature, etc..) In simple
terms, the paperwork that the customer needs to pay the bill.
How Invoice Factoring Works
The following is an
of how factoring works. If you have questions about the terms used
herein you can refer to Factoring Terminology. rates will vary based
upon the nature of the advance size and the customers. For actual rates
please submit a business app with aging report of payables &
receivables.Factor will complete its due diligence on the client and the
customers. Factor and the client will enter into a Factoring and
Security Agreement, as well as some additional documentation. Factor
will notify the customers of the change of address for remittance of
payments. The client will submit an advance request for $10,000 along
with the invoices, the supporting documentation and assignment. The
factor will verify the advance to ensure that the invoices are complete
and that the accounts receivable are due and payable. Factor will
multiply the advance request of $10,000 times the advance rate of 80% or
$8,000 and subtract the initial fee of 3.5% or $350 for a total funding
to the client of $7,650. The invoices are then mailed to the customers.
When the customer sends payment to the lockbox in 30 days. The factor
will take from the payment the amount advanced and the initial fee. The
factor would then remit to the client the balance left over when the
reserve settlement is released.
In this example using an advance
rate of 80% and an initial fee of 3.5% for an initial fee period of
thirty days the factor will advance 80% of the $10,000 advance request
or $8,000 less the initial fee of 3.5% or $350 for a total advance of
$7,650 to the client.
In this case that would be $10,000 -- $7,650 -- $350 = $2,000.
extent that some invoices are not paid in thirty days, then additional
late fees are charged on only the invoices unpaid for each late fee
period that an invoice is outstanding.
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