Thinking of using factoring to finance your business? Wondering how the whole process works? We have answers to the most frequently asked factoring questions when it comes to selling invoices.
What is accounts receivable factoring?
Factoring is the sale of invoices or receivables to a factoring company at a slight discount.
How does factoring help my business?
Your business gains immediate access to cash rather than waiting 20, 30, or even 60+ days for your customer to pay on invoices. You have the freedom to pay bills, meet payroll, replenish inventory, purchase equipment, manage overhead, fund expansion, and increase profits. These are just a few benefits of factoring.
How does AR funding work?
The first step is to set up an account with a Factor using the Factoring Application. Once the account is established, you send the new invoice to the Factoring Company who then issues an advance for the agreed upon percentage.
The balance or reserve is released to you once the factoring company collects payment on the invoice from your customer. The factoring fee is deducted from the reserve balance.
How much does factoring cost?
The factoring discount or fee depends on the industry, customer strength and performance of the accounts. On average a factoring fee will be between 2-5%. The specific terms will be clearly spelled out prior to factoring and we will suggest ways to minimize the costs.
How long does it take?
Setting up an account can take 5-10 days. Once the account is set up an advance is typically funded within 24 hours of invoice submission.
What invoices qualify for funding?
Factoring is available on commercial invoices where your customer is a business entity (rather than an individual consumer). The product, goods, or services should be complete or delivered and accepted by the customer. The factoring company will verify the credit worthiness of your customer, which also helps you avoid extending terms on potentially risky invoices.
Can I just sell some of my invoices?
Yes! Factoring companies will allow you to pick and choose which invoices to factor. Of course they must be credit worthy but the factor will help you decide which ones are in your best interest to sell.
How long do I have to work with the Factor?
This really depends on your needs. The average business may factor for 2-3 years while others elect to use spot factoring for a one-time infusion of cash. There are many companies that continue to use factoring through the life of their business. Factoring is flexible and there are options to meet your need for working capital.
How is factoring invoices different than a bank loan?
Factoring is the purchase of receivables and not a loan. This enables your business to access working capital without incurring a debt obligation. A bank approves loans based on your financials, credit history, and assets while Factoring Companies look to the credit worthiness of your customers paying on the invoices.
Factors can say “Yes” even when banks say “No” to business financing. This can all be decided in days rather than the weeks or months it takes banks to approve a loan.
What if I have poor credit or no credit?
You can still be eligible for invoice factoring. The Factor primarily looks at the strength of your customer (the debtor on the invoice), not you or your business.
What if I have a bank loan or tax lien?
Oftentimes the factor can work with the bank or tax entity to have them subordinate their position. If there are enough receivables you may even be able to pay off the loan or tax obligation. It’s important to mention this in the application process to see what options are available.
What happens if my customers don’t pay?
That depends on how the terms are set up in the factoring agreement. If it is non-recourse factoring then you may not be responsible. If it is recourse factoring then you will need to repay or replace the bad invoice.
Where do the payments get sent?
Your customers will remit payment on the invoices directly to the factoring company. The remainder of the reserve balance will then be forwarded on to you.
What if the customer mails me the payment by accident?
This is common, especially on the first payment. Factoring companies require you to forward them the check. In other words, you are not to cash it and write another check to the factoring company. This helps keep track of your customer’s credit worthiness (as well as avoid fraud). Your customers will then be reminded that they need to mail payments directly to the factor.
How do I know my customers will be treated well?
Your customers are valued and will be treated with the utmost of professionalism. We want you to succeed and continue to grow. A factoring company is not a collection agency and will maintain your customer satisfaction just as you would.
What should I tell my customer? Will it look bad if I am factoring?
Odds are your client may already be familiar with the process and not think anything of it. If for some reason they are not, you simply need to tell them that you have chosen to use an outside company to manage your account receivables. Factoring has been around for thousands of years and today many of the Fortune 500 companies use AR funding.
How can I get started with invoice factoring?
To begin the funding process we start with the factoring application. It also helps to include a recent accounts receivable aging report, Articles of Incorporation or business filings, sample invoices, and a list of your customers.
If you have any questions we invite you to contact us at any time. We are here to help!
Mr. Stephen Thuo
Seplan Capital LLC