Q: What is factoring?
A: Factoring, also known as invoice factoring, allows a business to receive money owed to it in advance of collection. Rather than waiting 30, 60 or 90 days to receive payment, factoring provides a business-to-business company with much faster access to its money.
Q: How does factoring work?
A: A business engages with a factoring company or independent financing company to create a factoring partnership. In this arrangement, the business sells its accounts receivable or outstanding invoices. The steps include:
1. The business sends a copy of the invoice to the factoring company.
2. The factoring company quickly advances 80-90% of the invoice amount into to the business’s bank account.
3. The business’s customer sends payment to a lockbox in the business’s name according to payment terms.
4. The factor releases the remaining 10-20% minus a small administrative fee into the business’s bank account.
5. The factoring arrangement gives the business faster access to cash, allowing the business to use the money immediately as it sees fit.
See this post for more detail on the factoring process.
Q: Is factoring expensive?
A: Factoring offers flexibility when traditional financing options aren’t a fit. Factoring rates tend to be higher than conventional business loan rates, but great variability exists among how different factoring companies structure deals. Finding a reputable partner with a transparent pricing strategy will ensure the business gets a competitive deal.
Q: Who uses factoring?
A: Many companies use factoring to help accelerate cash flow. A business-to business company generating invoices with payment terms may be good candidate for invoice factoring. Industries using factoring most frequently include:
• Facility Services
• Food & Beverage
• Professional Services
• Textile & Apparel
• Oil & Gas
• Janitorial Services
Q: What will my customers think about factoring?
A: According to the Global Factoring Market 2016-2020 report, analysts expect factoring to grow over 10% annually for the next several years. With more companies utilizing invoice factoring, it continues to grow as a necessary and responsible way for financing a business. Understanding the manner and circumstances in which the factoring company will communicate with the business’s customers is important. As long as the communications are professional and in line with the business’s message, customers don’t typically have any issues.
Q: When do companies use factoring?
A: Companies utilize factoring as a cash flow accelerator in many circumstances. A few of the most common uses include to:
• Purchase inventory or capital equipment
• Invest in marketing
• Meet payroll
• Meet tax requirements
• Obtain better payment terms by paying faster
Q: Why use factoring over other types of financing?
A: Factoring helps businesses accelerate their cash flow and secure financing in a debt-free manner. The sale of the business’s invoices funds the growth, so the business owner maintains control and doesn’t have to give up any equity or ownership. With factoring, the availability of cash keeps extending and growing as your business expands.
Q: Is factoring the same as a loan?
A: No, factoring is not a loan. The business does not incur debt. The business sells its accounts receivable (invoices) to the factoring company.
Q: Can a start-up business use factoring?
A: Yes, a start-up business may be an ideal candidate for invoice factoring. While traditional lending options often require two years of operating history and a track record of profitability, factoring provides greater flexibility.
Q: Will personal credit issues restrict a business owner from using factoring?
A: No, personal credit issues alone won’t keep a business from being approved for a factoring partnership. A host of factors go into the credit decision, with the most weight on the credit quality of the business’s customers. Some business owners using factoring have experienced bankruptcy, tax liens and other financial circumstances that make traditional lending options difficult to secure.