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Invoice Factoring Guide
Commercial factoring allows your company to receive funds on accounts that may be otherwise slow, creating a better cash flow for your business. Factoring is a great way to facilitate the operations of a company regardless of the size or the success of your company. Factoring advances you a high percentage of your money that you would otherwise have to wait for if you collected your receipts in a normal fashion. Many companies will use this method in order to create liquidity for a payroll, pay off other high interest debts or invest in extra hardware for a project that is upcoming. Here are some of the things that you should consider if you are in need of financing. You can actually finance a great deal more than you can borrow.
The Basics of Commercial Factoring
If you have a current client base that gives you a floating accounts receivable ledger, then you may be able to use commercial factoring. Many companies will use commercial factoring in place of a traditional loan. In order to initiate the procedure for commercial factoring, you must firsthand over the copies of your accounts receivable that you are looking to fund. Depending on your type of business, previous credit history and the terms of your agreement, you will be forwarded anywhere from 70 to 90 percent of the invoices that you have. Usually this process takes anywhere from two to five days. If you are able to accept electric invoices, then you may actually get funded within a day.
In order to accept your invoices, the underwriting factoring company will need to research your client base. The more creditworthy that your clients are, the better your chances are of getting a commercial factoring agreement. This company will then look at the original invoices and validate them, sometimes requesting payment from the clients. Once all of the invoices have been validated, your clients will then receive a Notice of Assignment. This will ensure that all of the future payments of those clients will go directly to the underwriting factoring company.
Your factoring partner will forward you the remainder of the invoices after receiving payment from your customers. There will also be a small factoring that is factored into the payment - this discount rate will be anywhere from one to five percent depending on the agreement that you have with the underwriting company. Most underwriters will provide you an online system that will allow you to monitor the entire process in real time.
The Benefits of Commercial Factoring
Aside from receiving money more quickly into the business, there are a number of further benefits that a company can get by partnering with a commercial factoring business. This is true for a business of any size, from a company with less than $5000 in accounts all the way up to companies with $10 million in annual sales. Here are just a few of the benefits of partnering with a good commercial factoring company.
First of all, your company will deal with must less administration than with any other loan package. Commercial factoring has less paperwork than perhaps any other line of credit or loan that a bank gives out. Secondly, a business may have access to more cash with a factoring agreement than with any other loan package. This is especially true if the company has a credit history that is marginal. Because the amount of money that a company receives is based on actual receipts, the factoring company is not worried about long-term credit history or any collateral that your business has.
It is also much easier to get funded through a commercial factoring agreement than through any other type of loan. Because the underwriting factoring partner is concerned with your clients' credit history, you do not have to go through the rigors of proving your own creditworthiness in order to get the money that you need to do business. It is also a great option for businesses that rely on funds to be available quickly.
The Fees of a Commercial Factoring Contract
There may be a few fees associated with the privilege of taking out a commercial factoring partnership. Below this article will list a few of the major fees that you may need to consider when you are vetting commercial factoring companies. You will also learn methods that will allow you to reduce the fees that you would have to pay to a commercial factoring company. First of all, a higher volume of customer receipts will get you a better discount rate with your commercial factoring company. The more receipts that a business gives to a factoring partner, the less work that a factoring partner has to do in order to create a profitable partnership. Larger businesses are also considered much less risky to a factoring company. They have more customers to cover receipts if a few of them do not follow through on their payments in the future.
The credit scores of your clients also play a big role in determining the fee that you will be charged for the partnership. If your invoices have high quality clients good credit scores, then your fee will come down considerably. This has to do with the risk of collection on future receipts that the factoring company will have to take on with its Notice of Assignment. There is also a consideration of industry risk to a factoring company. For instance, the entertainment and garment industries usually come with a higher discount rate than a factoring agreement with a manufacturing plant. Because manufacturing is a much less risky industry than clothes or entertainment, the factoring company will be able to rely on a much more steady flow of income that does not have anything to do with the seasonal nature or the fickle audience of more volatile industries.
If you have a loyal customer base, you will also receive a great deal of consideration for that. Even if these clients are not as creditworthy, they lessen the risk of the factoring company because they continue to pay into the business system. Finally, there are some billing considerations to account for. If you require process billing, there will usually be a higher factor fee associated with this because of the increased administration that is required. In the same way, non-recourse factoring may cost your company a bit more in relation to the fee because the factoring company is taking on a higher risk by implementing this feature.
Buying Tips when Choosing a Commercial Factoring Company
First of all, you should check the industry credentials of the factoring company that you are considering. The International Factoring Association is a nonprofit organization that serves as a watchdog for commercial factoring companies. Any company that you are considering should belong to a national organization like this one. Do not put too much emphasis on the cost of the company. If you are receiving a great deal of service, then you will save more money in the long run when you deal with a great factoring company. You may also be able to get a better rate from a top company if you transfer over your best receipts rather than all of them.