What is Bank Factoring?
Factoring is a transaction between a business and a third-party (the factor) which provides quick cash flow in exchange for accounts receivable and/or other assets. A business can use its invoices (accounts receivable) as leverage or sell off accounts receivable to the factor to obtain cash. Depending on the arrangement, the cash is either discounted or reduced by fees charged by the factor. A bank factoring company uses the same steps as a traditional factor, but requires the factor to be a regulated bank. There are many nuances and differences between traditional financing companies and banks that offer factoring. Each provider has its own way of defining the types of factoring available.
With altLINE we break out our accounts receivable-based products into three structures:
- The first is asset based lending which is a loan secured by business assets. The collateral is either the inventory, accounts receivable or balance sheet assets. Since asset lending is similar to a revolving line of credit, the business can borrow from assets on a continual basis to cover expenses as needed.
- In accounts receivable financing, a business sells the value of its invoices to a third-party factor (ie. independent factoring company or a factoring bank) at a discount. The third-party processes the invoices and the business receives funds based on the expected money due from their client (the debtor). This structure operates similarly to a line of line of credit.
- Invoice factoring is the third method, in which a business sells invoices to the third-party (the factor). The factor gives the business a percentage of the total value of invoices and collects invoice payments from the business’ client. After the client pays the invoice, the factor pays the business the remainder of the money collected and keeps back a transaction fee.
As a bank factoring company, altLINE offers various accounts receivable financing structures to fit the varying needs of a business.
Benefits of Factoring
Factoring is not a loan thereby no liability is reflected on the balance sheet. It establishes steady cash flow and eliminates the 30, 60, 90-day waiting period for the accounts receivable of a business. The factor manages invoices and implements credit reviews of the clients for the business. The factor advances funds against invoices and collects money owed by the business clients. Time management is optimized and the business can direct its energy towards sales, market expansion, and other endeavors.
1. Funds are advanced to the business before clients pay the invoice for goods received.
2. Factors provide credit control – the collection of funds is managed by the factoring entity.
3. Factoring provides capital while the business has open invoices.
4. Factoring is not a loan since the invoices/accounts are purchased by the factoring entity. They do not show on the books as a liability so this reduces balance sheet debt.
5. Businesses which experience seasonal fluctuations in their business have periods of insolvency; factoring is a means of acquiring cash flow based on money owed by clients.
6. Quick access to funds with invoice factoring – funds available within 48 hours after an invoice is generated.
7. Relief from debt collection.
8. No debt to repay.
Factoring Companies –Many Choices
Since there are limited barriers to entry anyone can start a factoring company. As you would expect, some factoring companies are better than others. Take the time to research and get comfortable with your factoring partner. The two types of factoring companies compared here: independent factors, and bank factors (also known as a factoring bank). Check out this infographic for more information:
Independent Factoring Providers
Independent factoring companies work with businesses who need to accelerate cash flow and may have been turned down by a bank. A business with creditworthy customers may be eligible to factor even if it can’t qualify for a loan. In factoring, the lender is primarily concerned with the creditworthiness of the client versus the business.
Bank Factoring Providers
A bank factoring company provides the same flexibility and benefits as an independent factor, but also offers additional advantages.
A bank factor works with many businesses who are considered outside of the traditional credit box. Many of these businesses have been told “no” by a bank for a commercial loan, but they are still very strong candidates for working with a bank that offers factoring, or accounts receivable financing financing. Businesses that work with a bank owned factoring company may also have an easier time transitioning to a commercial loan at a later date.
Banks are more secure and provide a sense of financial stability for the business. A business’s clients are very valuable relationships and a bank offers a level of comfort not found in independent alternative financing companies. Clients feel better about interacting with a bank than an unfamiliar or unknown business entity.
In addition, since the bank has its own funds, it can offer the business very competitive rates. Unlike many independent factoring companies who work with multiple funding sources, a bank acts as a direct source of funds and eliminates the middleman.
Factoring is a common solution to cash flow and is best used during growth periods or when the account receivables are large. The business benefits since the time between delivery of goods and funds realized is short. The business is relieved of the burden of chasing debt and can focus on other pertinent issues.
Contact us today to see how factoring with a bank can help your business grow.
Grey Idol is the head of digital marketing for altLINE. With over five years’ experience in small business operations, content creation and digital marketing, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing. In his free time, Grey enjoys spending time outdoors with his wife and two dogs.