Factoring is a type of invoice financing many companies use as a source of cash. Also referred to as accounts-receivable financing or receivables factoring, invoice factoring is when companies sell their accounts receivables (invoices) to a third party known as a factoring company. Instead of waiting 30, 60 or even 90 days for customer payment, these companies receive immediate cash while the factoring company awaits payment.
Invoice factoring provides companies the cash they need to not only operate their business, but also to grow. Factoring is not a loan, so there is no debt incurred. The cash received from factoring is based on the credit and payment history of a business’s customers, not that of the business itself. This makes factoring advantageous for companies that might not qualify for traditional lending, or don’t want to increase their debt.
Factoring is a straightforward process. First, a business enters into an agreement with a factoring company. The business performs their work and bills as normal. Instead of sending the invoice to their customer, the invoices go to the factoring company. Once the factoring company purchases the invoice, it deposits an advance on the invoice total directly into the business’s bank account within 24 hours. Once the end customer pays the invoice, the factoring company pays the remaining balance, less a small fee.
While many businesses turn directly to a bank when they need working capital, the process is not as easy as you might think. The steps involved in getting business loans or business lines of credit can take weeks, or even months. What’s more, a bank loan or line of credit will create debt on your balance sheet. Banks use your company’s credit to qualify the business for business loans and business lines of credit. Companies with no credit or less-than-perfect credit can’t obtain substantial cash to maintain and grow their business. Even if your business does qualify, there’s a limit to how much you can access, which can hinder your business from growing.
|Factoring Receivables||Business Loan & Business Lines of Credit|
|Qualify Based on Your Customers’ Credit||Qualify Based on the Credit of Your Business|
|3-5 Day Application Process||1-2 Month Application Process|
|Cash within 24 Hours or Less||Funding in 1-2 Months|
|Invoices Serve as Collateral||Inventory, Equipment, Assets, Etc., Serve as Collateral|
|Does Not Create Debt||Creates Debt|
|No Monthly Interest||Monthly Interest|
|Minimal Paperwork to Get Started||Extensive Paperwork to Get Started|
|Free Credit Reports on Your Customers||No Credit Services|
|No Limits – Financing Grows as You Grow||Limits – Loan or Line Is Capped|
At the foundation of a relationship with a factoring company is the factoring agreement. The agreement is the contract between the client and factoring company. These typically include:
The term of the contract varies depending on your program. There are contracts written for three months, upwards of six months and others for multiple years. At TCI Business Capital, we even offer month-to-month contract to meet our customers’ needs. Be sure to ask your potential factoring company questions and read through the contract thoroughly prior to signing.
Most agreements will include a volume commitment. By committing to factor a specific volume of invoices, a company can receive the maximum advances and lowest rates to optimize their cash needs.
In most cases, factoring companies advance you anywhere from 70 percent and up of the invoice amount. The amount advanced is based on variables such as your customers’ creditworthiness, pay trends and volume.
Factoring company fees vary based on items such as volume, the size of your invoices, your industry, customer pay trends and other variables. Some factoring companies charge a flat fee for the service, whereas others may have a factoring fee and additional charges for other administrative and support services they provide. Be sure to read the fine print of your contract so you know exactly how much you’re being charged, and ask questions.
There are many factoring companies in North America. Choosing the right factoring company is key to a successful factoring relationship. A factoring company should be able to meet the cash requirements of the client, and offer services that add value to the factoring relationship.
Because factoring has made its way into several industries, companies have divided themselves into either specialists or generalists.
A factoring company that provides financing to multiple industries is referred to as factoring generalist. In most cases, factoring generalists have a client portfolio spread over several industries with the majority of clients being smaller companies.
On the other hand, a factoring specialist usually factors invoices for a specific industry. For example, a factoring company may factor invoices for staffing, but the majority of their business comes from the trucking industry. Most times, the client portfolio is composed of small- to mid-sized companies that are predominantly in one industry.
Factoring companies are classified as either a recourse or nonrecourse factoring company. It’s important to know the difference between the two when selecting one that works for your business.
Recourse factoring is the most common among factoring companies. With recourse factoring, factoring companies have the right to sell the invoice back to you if payment isn’t made within a time period specified on your agreement. Typically the time frame is 90 days or more.
Conversely, nonrecourse factoring is not common in the accounts-receivable financing industry. Several factoring companies advertise as nonrecourse factoring companies, but the contract’s fine print lists various reasons why an invoice can be exempt. If a factoring company is truly nonrecourse, the factoring company takes on all credit risks for the collection of the invoices you sell it. As a result, you’ll pay much higher fees and experience more stringent credit reviews as compared to recourse factoring.
The need for cash is why most businesses enter into a factoring relationship. In addition to improved cash flow, factoring company value-added services can strengthen the client’s business. Take a look at some of the value-added services we offer below.
Since 1994, TCI Business Capital has provided best-in-class factoring services to thousands of small- to mid-sized companies across the United States and Canada. We offer reliable cash-flow solutions, enabling companies to meet the challenges and opportunities they face.
Our customers work on the front lines of North America’s growth sectors. They choose us for the working capital they need because they can’t always get sufficient financing from a bank or they don’t want added debt. Because of our creative finance solutions, we can provide cash to businesses in a wide range of industries.
Our easy-to-set-up factoring lines allow customers access to the working capital they need, quickly and easily. Approvals can be done in 10 minutes and funding within 24 hours. We distinguish ourselves from others through our get-it-done culture, reliability, flexibility and award-winning customer service.
Factoring is one of the oldest forms of financing, dating back about 4,000 years to King Hammurabi of Mesopotamia.
Around 1300 A.D-1400 A.D., factoring was a popular form of business that England used for overseas trade when purchasing and selling clothing and grain. The process used then was very similar to how factoring works today.
When the Pilgrims made their way to the New World, so did factoring. Payments were needed on raw materials that were shipped from America to England, and factoring was the finance solution many used.
In the 1970s and 1980s, interest rates rose and banks weren’t extending credit to people and businesses, as the risk seemed too high. Factoring companies offered businesses the financing needed in order to survive. Factoring expanded into several industries and continues to do so today.