How Factoring Works
With the assistance of a factoring company, businesses sell or borrow against their outstanding commercial accounts receivable. The cost is a fee often referred to as a discount — typically between 1-5 percent of the invoice or the amount borrowed. The accounts receivable are sold at a discount to the factor who in turn will collect from the party owing for the product or service provided by the business.
By factoring receivables, companies immediately benefit from improved cash flow; instead of waiting somewhere between 30 and 90 days or longer to receive payment, they will receive approximately 80-90 percent of the receivable in the form of an advance when the receivable is presented to the factor. In addition, the factor performs credit checks on customers to uncover any risks and help manage appropriate credit limits. Most factoring companies will also provide a follow-up service to assist with keeping the client’s customers paying more promptly.
Although commonly called a loan, factoring isn’t a loan; it’s the purchase of an asset, and in some cases the purchase can be structured on a Non-Recourse basis, in others it can be done with Recourse back to the company.
One thing to note is that factoring companies need to be more insightful about the inner workings of their client’s business than traditional lenders are. Since they are lending against their client’s outstanding receivables, it’s the factoring company’s job to know all about the client’s customers, terms, invoicing, and the billing process. Factors need to possess an in-depth understanding of their clients’ industries and the business nuances between their clients and the clients’ customers in order to be a positive partner for the client.
Contact us to learn more about our factoring services.