What Is Factoring?
Factoring means that someone will buy your accounts receivable (often shortened to “receivables”), and they will do the collecting. You can sell all or some of your receivables to the factor, or you can sell individual invoices directly. The factor is the company buying the receivables, which is usually a financial firm that specializes in receivable financing. The factor buys the receivables at a discount, such as 60%-80% of their outstanding value, and charges interest on the cash advance, fees, and sometimes a commission. The factor may also charge a fee for each invoice or each account. The reason the buyer cannot advance the full value on your receivables is that they don’t know whether they’ll be able to collect from your customer or get paid. Also, it may take time and money for them to check the credit on all your customers and to run the collections process. Factoring is a $3 trillion business and has been around for a long time. Factoring companies are legitimate businesses that make their money by knowing the value of receivables and being good at collecting on them.
What Can I Expect to Be Paid? How Long Does It Take to Get My Money?
The factor will review your receivables and give you an initial amount within a few days. They will also typically charge a fee for the collection process of 1% to 4%, depending on how difficult the receivables are to collect. The amount of cash paid by factoring companies can vary, but it’s usually based on three conditions: With the initial discount on the purchase of your receivables and the fees, you may not be paid any more than 40% of your receivables’ value, but the percentage can vary with each financial firm.
What About My Customers?
The factoring company wants to treat your customers well for three reasons:
Can I Use a Factor on a Continuing Basis?
Many factoring companies become de facto outsourcing for accounts receivable. That is, you could continue to turn your receivables over to the factor, so you don’t have to spend the time and money to collect. If you have individual customers or clients, you might want to collect personally, but if your customers are other businesses, you might decide that factoring can save you money and hassle.
How Do I Select a Factor?
Do an Internet search to find a list of factors that work in your state. Then select several to interview. Some key points to look for when selecting a factor:
What experience have they had with factoring? How long have they been in the business?Who will actually be doing the contacts with my customers? What is this person’s demeanor? Is he/she friendly? Courteous? Be sure that the factor will not destroy your goodwill with your customers.How does the factor contact customers? If possible, review the phone scripts and letters they use to gauge their professionalism and courtesy.Does the factor refer accounts to collections? What criteria do they use for doing this? Do they notify you they are turning over an account to collections? If you have a continuing customer who doesn’t pay bills, you need to know this. The factoring company should be in communication with you about their interactions with your customers.
