Every day business owners juggle the cash flow demands of their companies. More than ever, they are turning to invoice factoring as a trusted solution, even when banks decline loans and credit lines.
If you are considering accounts receivable funding, it pays to be prepared. Save time and money by understanding these five tips before making application to factor your accounts receivable:
1. The Factoring Application
The first step in the process is helping the factoring company get to know your company. This might start with a phone conversation but will eventually be formalized in a factoring application. This provides basic information including:
- Company name
- Contact information
- Type of business
- Information on your customers
The nature of the business and the type of customers play the leading role in determining whether a factoring company will move forward with the transaction. Most factors are looking for invoices that are owed by a business rather than individual consumers.
Other factors specialize in certain types of invoices. For instance, construction factoring or medical receivables will only appeal to a company that targets those areas.
2. Aging Reports
The aging report provides the detail that goes along with the initial application. This report reflects the amounts owed by your customers and the length of time it takes them to pay on the invoices. A customer that pays within 30 days is more attractive than a customer that takes 45-60 days.
3. How Factoring Works
Factoring is the purchase of accounts receivable at a discount. The factoring company provides an advance on approved invoices. The factor handles collection and releases the reserve balance when the customer pays the invoice. The factor deducts their fee before releasing the balance.
4. What It Costs
The first question every business wants to know is, “What will factoring cost me?” Don’t be frustrated when the response is, “It depends.” The industry, the strength of the customer, and the length of time it takes to receive payment all affect the advance rate and the discount fee.
The volume of invoices a business plans to factor also impacts pricing. A company desiring to factor $400,000 every month will receive better rates than a business factoring $15,000 on a sporadic basis. The terms offered by the factor can often be negotiated and will ultimately be spelled out in the contract.
5. The Underwriting Process
The factor is very interested in the strength of your customers since they are actually purchasing the accounts receivable rather than making a loan. The factor will evaluate the creditworthiness and establish credit limits for each customer.
The factor will also perform a public records search on your company to verify there is clear title to the accounts receivable. This search usually includes corporate status, judgments, liens, UCC, pending litigation, back taxes, criminal records, and any other items that might interfere with the factor receiving payment on the invoices.
This due diligence process takes an average of 5-10 days on new accounts. Once the initial review process is complete it can take as little as 24 hours to receive cash for invoices with approved customers.
Factoring provides cash flow solutions to both new and established businesses providing funds for operational expenses, expansion, and growth.