Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a Factor) at a discount in exchange for immediate money with which to finance continued business. Factoring is NOT a loan. There is no debt repayment, no compromise to your balance sheet, no long-term agreements or delays associated with other methods of raising capital. Factoring allows you to use your own hard-earned assets to create cash for the growth needs of your company. Your business gets a percentage of the invoice within a few days and the factoring company takes ownership of the invoice and the payment process.
Recourse vs. Non-Recourse Factoring
Factoring companies usually offer one of two types of factoring: recourse and non-recourse. In a recourse factoring plan, your company is responsible if your client does not pay. In a non-recourse plan, you don’t have to pay the factor back if the client does not pay due to bankruptcy. However, the bankruptcy usually needs to happen during a certain time period that the invoice is outstanding. Bankruptcies after this time period are often not covered. This important detail is often overlooked.
Note that non-recourse factoring does not protect you against late client payments. Non-recourse factoring might not necessarily be better for your company. While non-recourse offers some protection against client bankruptcies, it comes at a price. Non-recourse plans tend to be more expensive and restrictive. You will want to check with your prospective Factor to see if they offer recourse or non-recourse factoring.
What to Look for in a Factor
Selecting the right Factor is critical to the long-term success of your company.
First, check the IFA website to make sure they are an IFA member in good standing:
Also ask if the Factor can provide client references so you can help determine if they are a good fit for you. Some other questions to ask are:
• Do you specialize in a certain industry?
• How long have you been in business?
• Do you provide additional services?
• Do you have experience working with well-known logistics companies? (If in the transportation industry)
What is a UCC Filing?
Factors often place a UCC filing on companies when an application gets filed. A UCC filing creates a security interest in the collateral (receivables) of your company and lets other creditors know the Factor has priority in your receivables or other assets. By filing the UCC when an application is submitted, the Factor can provide funding at the moment the applicant is approved.
The Factor incurs fees when a UCC is filed and in the process of doing due diligence on the application, which may be passed on to the applicant. Prior to filling out an application, you should ask the Factor what fees will be charged and how quickly a UCC filing will be released if you choose to go with another factor.
What to Look for in a Factoring Contract
How quickly can a Factor setup your account and fund invoices?
• Auto renewal
What are the contract dates?
What is the time frame that must be given to end the contract?
How must the client terminate the contract? Certified letter, call, Email?
Initial fee charges then a % after a certain number of days
What are rates after the initial fee?
When will the reserve be reimbursed?
Is there a reserve shortfall fee?
Is there a minimum amount that has to be factored?
Invoice processing fees
Early Termination Fees
Reserves amount – dilution drives advance rate
Other ancillary fees
• UCC Filings
When will they be filed?
What are the fees to get release?
Termination fee for releasing UCC
Does company do buyouts?
What is the timeframe?
What are fees associated with buyouts?
Will Factor continue factoring invoices if termination is given and until buyout is complete?
What backup is needed?
What Services do Factors Provide?
The main advantage of working with a factor is that your cash flow improves immediately. You don’t need to have money tied up in slow-paying accounts receivable. Instead, you have cash-at-hand to pay expenses and take on new clients.
Additionally, factoring can provide:
• Assistance with business credit decisions
• Assistance with back-office support
• Assistance with collections
• Fuel card discounts and fuel advances (If in the transportation industry)
• Flexible lines that increase quickly
• Easy qualification requirements
How to Find a Factor
If you are looking for a Factor and you do not know where you start, you can use the IFA’s Factor Search function. The information you enter is confidential and will be sent only to those registered members of the IFA that match your company’s criteria.
Using the IFA to locate a factor is an easy, effective and a confidential way to get information on your company sent to factors that are willing to finance your business. Based on a simple questionnaire, your information is sent to only those factors that are best suited to finance your type of company. You will only be contacted by registered IFA members.
This service is absolutely FREE.