Most companies that are looking for factoring financing try to focus are negotiating efforts on getting the best factoring rates. However, many prospects fail to take into account that the factoring rate is only one component of your total factoring cost. The other component of cost is the factoring advance, which plays a very important role. This article will help you understand how both the rate than the advance work so that you can be in a better position to negotiate or factoring contract. A simplified factoring transaction usually has three components:

1. Factoring Advance: Is the amount that is paid upfront. It usually ranges between 70% and 85% of your invoice.
2. Factoring Rate:  It’s the cost of the transaction. It’s usually a percentage.
3. Factoring Rebate:  It’s the remaining 30% to 15% (less the factoring fee) which gets advanced to you once your customer pays the invoice in full.

In a simple factoring transaction, you get the advance immediately once the work is completed and invoiced for. The rebate, less the factoring fee, is provided once your customer pays in full. The transaction structure is very important because in order to get the lowest possible cost of funds, you need to have a combination of the lowest possible factoring rate and the highest possible factoring advance.

In our view, the most effective way to negotiate a lower cost of funds it is to outline all the details of the factoring transaction and then determine which components play a role. This will usually include the advance, the rate, the rebate, any reserves and ancillary fees. Once you have done this, you should make sure that you negotiate each and every point in order to ensure a favorable outcome. You should also note that this article only covers the factoring rate, the advance, and the rebate. Many factoring companies offer proposals that are more complex and have other variables that need to be negotiated.

Disclaimer: this article oversimplifies the very complex matter of negotiating the cost of business financing. It does not intend to replace the advice of a financial or legal professional if you require it. As a matter of fact, we encourage that you seek financial and legal advice from competent professionals that are familiar with your circumstances.

Most companies that are looking for factoring use a shotgun approach where they try to contact as many factoring companies as possible, submit as many applications as possible, all with the hope that they will get the best factoring rates. While this is a common approach – it seldom works. A better approach is to evaluate factoring in a systematic way and then zero in on the companies that best fit your needs. Here is how.

From a factoring company’s perspective, the rate that they charge is a reflection of the risk of not getting paid back. The higher the perceived risk of your business – the higher the rate. It’s a simple equation. Basically, if you want to get the most competitive factoring rates for your company, you  need to find a way to lower the factoring company’s perceived risk. For many, the best way to do this is to follow these steps:

1. Find a factoring company that is knowledgeable and established in your industry
2. Present a professional image of your company
3. Present a professional and complete factoring application

Let’s cover the first step. How do you determine if a factoring company is knowledgeable and established in your industry? The answer is simple – you call them and you ask. Most factoring companies will give you a good idea of the industries that they specialize in if you ask them. And this is very important because most factoring companies have certain industries that they specialize in. And because they have a good understanding of their industries, they can give the best rates.  It’s also good idea to ask them a couple of key questions about your industry, just to ensure they are as knowledgeable as they say. For example, if you’re in transportation, you should ask them about their freight bill and paperwork procedures, and which shippers and brokers there familiar with. Additionally, you may want to ask them to provide you with a few references that have been clients for more than one year.

The next step is to make sure that you present a professional image for your company. While this is subjective, it can have a great influence on the type of factoring proposal that you get. If the factoring company perceives your company to be professional, and therefore well run, it will usually assume that it has a lower risk of default. This usually translates into lower rates. Conversely,  if your company is presented in an unprofessional manner, you can expect that to be reflected in your proposal as well.

Most prospects don’t do a good job in step number three – presenting a professional and complete application. Most factoring companies are accustomed to getting applications that are very difficult to read, are missing important documents, or just plainly have inaccurate information. This will have a negative impact on your proposal. Actually, if you don’t do a good job in your application, you may be declined the proposal. Once you have selected the factoring companies that you want to apply with, your best course of action is to present a well-written and well documented application. Use careful handwriting, give honest answers, and make sure that you include everything that the factoring company is asking for. And if there is something that you can’t provide them, be sure to be upfront about it and mention it in the application.

This last point can create a problem for some prospects. Many companies look for factoring to solve their cash flow problems – and cash flow problems don’t look good in an application. So what do you do? We think the best strategy is to be honest and upfront about your problems. Factoring companies are used to working with companies in high-growth environments that have gotten themselves into cash flow problems. They will usually understand. Just be sure that you are upfront about this and present the problem honestly, alongside your proposed solution to remedy it.

In summary, the best way to ensure that you get a competitive accounts receivable factoring proposal is to make sure that you manage the perceived risk of your application. You can do this by making sure that you select a factoring company that specializes in your industry, by providing a professional presentation of your company, and lastly by making sure that your application is honest and complete.

Factoring is a business financing product that has been gaining  market popularity in recent years as an effective alternative to lines of credit. It is designed to help companies that have certain types of cash flow problems. This short article will help you determine if your business – and your situation – are good candidates for factoring financing.

If your company offers payment terms to your customers that enables them to pay their invoices and up to 60 days – and if offering terms is creating a financial hardship – factoring financing may be right for you. Invoice factoring solves this problem by using a financial intermediary to accelerate the payments that are locked in slow paying invoices. It works by having the factoring company advance funds to your business using your invoices as collateral. This provides your company with needed working capital so that it can pay it’s critical expenses. The transaction settles once your customers pay on their regular schedule.

Companies that are good candidates for invoice factoring usually meet the following criteria:

1. They have commercial and governmental customers
2. Their customers are taking up to 60 days to pay their invoices
3. They need funds sooner to pay for operational expenses such as payroll, rent, suppliers, and equipment
4. They have profit margins of at least 15% (obviously, higher profit margins are better)

One of the reasons that factoring has become popular in recent years is that it’s comparatively easier to obtain than a business loan. The most important collateral requirement is to have credit worthy commercial customers. Most factoring companies do not require additional collateral such as hard assets or real estate. Additionally, an invoice factoring line is inherently more flexible than most conventional products. The financing line is linked to your revenues and will increase as your sales grow. This makes it a perfect alternative for growth oriented companies that have working capital problems due to slow paying customers.

The marketplace is full of factoring companies that promote to have their own unique type invoice factoring program. While it is true that each factoring company offers their own version of factoring, the reality is that there are only two basic types of factoring. This short article will help you understand each of the factoring types and provide you with information to make a decision that is appropriate for your company.

Let’s first start with a quick definition the factoring. Invoice factoring is a type of financing that helps companies that have cash flow problems due to slow paying customers. Factoring finances your open invoices which gives your company liquidity to meet operating expenses. Most companies offer either of two types of factoring – recourse and non recourse.

Full recourse factoring: This is the most common type of factoring and is widely available. In full recourse factoring your company remains liable if an invoice is not paid by a customer for whatever reason, be it quality problems, financial problems, or if they simply don’t want to pay. If an invoice is not paid, you will have to pay back the factoring company either by providing a new invoice, allowing them to debit reserves, or simply paying them back.

Non-recourse factoring: This is a less common type of factoring and it’s usually very misunderstood. An non-recourse factoring works exactly the same as a conventional factoring line with the exception that you do not have to pay back the factoring company if an invoice is not paid due to an insolvency of the customer during the factoring period. This last point is often misunderstood and many business owners think that non recourse factoring eliminates any responsibilities for payment if a customer doesn’t pay. This is not true. For the non-recourse component to become effective the reason for the non payment has to be insolvency, usually a declared insolvency such as bankruptcy or closure. And more importantly, the insolvency needs to happen during that factoring period which usually is defined as the first 90 days from the time that the factoring company bought the invoice from you. As you can see, this offers a very narrow protection. While it’s a good protection, it’s not as comprehensive as many people think. Since many companies offer their own version of non recourse factoring you should always examine your factoring contracts with a competent attorney to make sure that you understand exactly what are you getting.

One common question that people ask themselves is which type of invoice factoring is better? This is subject to much debate in the industry. The reality is that every factoring company will spend a considerable amount of resources determining the credit worthiness of the invoices they buy. You can expect them to be very careful when purchasing any invoice so the likelihood of them buying an invoice that will default is usually very slim – but it happens. Ultimately it’s up to you as a business owner to determine if paying a premium for non recourse factoring is worth it.

Invoice factoring has been gaining popularity as a financing solution in recent years. However, there are still a number of misconceptions as to how factoring works, who it can help, and what it can do for you. This article will help you understand factoring and help you determine if it’s the right business financing solution for your company.

Factoring solves a very specific problem – most companies that sell products or services to commercial customers have to give them payment terms. It’s common to give customers up to 60 days to pay an invoice. But the reality is that few companies can afford to offer terms because they need the money sooner to pay their own obligations. Factoring solves this problem by providing working capital to companies that are offering payment terms. The factoring financing line provides the funds to help your company cover critical business expenses. It also provides predictability to your revenues enabling you to take on new customers with confidence.

The mechanics of the factoring transaction are relatively simple. A financial intermediary, called a factoring company, advances funds to your business using your invoices as collateral. Usually the advance is about 80% of your outstanding invoices, though this varies by industry. Your company gets the remaining 20% (less any funding fees) once your customers pays and the transaction settles. A major difference between factoring and other types of business financing is in the collateral requirements. The most important collateral requirement to qualify for invoice factoring is to have solid invoices from credit worthy commercial customers. This is important because even small companies may qualify for factoring as long as they have solid customers and meet the factoring company’s requirements.

Generally speaking, factoring will be able to help you if the following are true:

• You are at risk of missing payroll
• You are at risk of missing supplier payments
• You can’t afford to offer payment terms to new customers
• Your commercial customers have good credit
• Your company has good invoicing practices

One important advantage of invoice factoring over other business financing solutions is that the line is growth oriented. This means that your financing line will increase to match your growing sales as long as your company meets the factoring criteria. Because of this, factoring is a great option for companies that have working capital problems due to slow paying commercial customers.

Factoring is a business financing tool that can help companies that are having cash flow problems due to slow paying customers. These types of cash flow problems are common for small businesses that have commercial sales and have to offer 60 day payment terms. While offering payment terms is a common practice, it can create serious problems for companies that don’t have the financial resources to wait that long for payment.

Invoice factoring financing solves this problem in the simple and way. A financial intermediary, called a factoring company, advances funds to your company and uses your invoices as collateral for the transaction. This provides your company with the needed working capital to cover operational expenses and to pursue new growth opportunities. The transactions are settled once your customers pay on their regular schedule. Most transactions are structured as follows:

1. You invoice your customer for completed work or delivered product
2. You submit your invoice to the factoring company
3. The factoring company advances about 80% of the invoice
4. Once your customer pays, you get the remaining 20% (less the factoring fee)

The most important requirement to qualify for factoring is to have credit worthy customers. This is important because the whole transaction uses their credit, rather than your credit, as collateral. Aside from that, your company should also:

1. Be free of legal and tax problems
2. Have unencumbered accounts receivable
3. Have owners with experience in the industry

One major advantage of working with factoring companies is that they are comfortable working with businesses that have cash flow problems, and can provide them with flexible solutions. Most factoring lines are designed to dynamically increase with your sales as long as your customers and your company meet the factoring requirements. This makes invoice factoring a flexible solution for growing companies that are facing working capital problems.

It’s not unusual for some business owners  to get  invoice factoring in order to factor the invoices from their trouble clients.  In part, this comes from a usually mistaken belief that a non recourse factoring program will buy your invoices regardless of their credit quality.  Troubled invoices are those that:

• Have disputes
• Pay very slowly (> 90 days)
• Come from customers that have bad credit and pose a collections risk

Selling these invoices to a factoring company will not help you and in the long run can generate cash flow problems for your business. Let’s first start with the value proposition of factoring. Factoring invoices is a tool that your company can use to accelerate revenues in order to strengthen your cash flow. The premise is that you sell your slow paying invoices from good clients to a factoring company who advances you funds for the invoices. The factoring company holds the invoice and then settles with you once it is paid. The fee for this service is based on the creditworthiness of your customer, the volume you finance and how long invoices take to pay. Obviously, invoices that take longer to pay cost more to finance. This leads to the two reasons why selling troubled invoices won’t help you:

• Most factoring agreements have a clause that states that invoices are due and must be paid in 90 days or less. If the invoice is not paid in that time frame, your company agrees to buy the invoice back from the factoring company. This is detrimental to your cash flow since you will also have to pay a fee for invoices that are returned. In most instances, a non recourse factoring agreement would only help you if (and only if) your client goes bankrupt during that 90 day period.

• Factoring usually works best when invoices are paid between 15 and 60 days. If the invoices pays before 15 days, you are usually better off waiting. If the invoice pays in more than 60 days, factoring will be expensive.  Factoring invoices that pay in more than 60 days will only work if your business has sufficiently high profit margins

One very good use of a factoring program is to work with the factoring company’s credit department to ensure that your clients are credit worthy in the first place. Most factoring companies have experienced credit analysis departments who will be more than happy to help you screen your existing and your new clients.

Invariably, whenever someone from the sales team answers a call, one of the first questions they have to answer is “Where is your office located?” Clearly, many companies would prefer to deal with a local business so location is important. Furthermore, many prospects are small businesses who like to operate based on personal relationships. The sort of relationship that requires regular meetings. This leads to the question, are you better off working with a local factoring company?

There is no simple answer for this. Our view is that you should work with the factoring company that is best suited to help you. Location is only one feature, but not necessarily the most important one. Most factoring transactions are executed by phone, fax and email, so from an operations perspective, your factoring and purchase order financing provider could be anywhere in the country.

A better question could be – how do I determine if a particular factoring company is the best suited for my company? That’s a difficult question to answer but here are some guidelines you should take into consideration:

• Are they comfortable with the size of your company? Many factoring companies advertise that they work with small and large businesses alike. Though that may be true, like any business, you can be certain that they are better suited to help businesses of of a certain size. Remember the old adage, you don’t want to be anyones smallest or largest client. Be sure to ask them what is the size of their average client.

• Are they comfortable with your industry? Some factoring companies have industries that they like and industries that they dislike. This will affect the kind of terms that you will get. It’s usually a good practice to ask them if they are comfortable factoring invoices in your industry.

• Are you comfortable with the terms they are offering? Perhaps one of the most important things you should consider. If you are not comfortable with the terms that they are offering you should seriously consider if you should do business with them. It’s a good idea to have a financial advisor working with before making this determination.

• Are you comfortable with them? Before entering into a invoice factoring agreement, you should research your factoring company (ask for references!) and determine if you are comfortable working with them. Remember, you will probably speak to them on a regular basis so this is very important.

If you find a local factoring company that meets all your criteria, then by all means, you should work with them. However, if you find a good factoring company that is better than all your local options, then more often than n0t, they will be the better choice.

Disclaimer: Selecting a factoring company is an important decision. You should hire a competent advisor to help you through the process.

Most companies experience cash shortages at one time or another. This article will explain how to address a common problem that causes shortages and will also suggest some strategies to del with them. However, this article should not replace the advice of a qualified professional. If your company has serious cash flow problems, you should consider speaking to a financial specialist immediately because waiting seldom helps.

Let’s look at the most common cash flow problem. In corporate sales it’s common to give customers 30 days to pay. Thanks to the economy, most customers have taken longer to pay their invoices. Some can take as long as 60 days to pay. This leaves companies waiting up to two months for payment. In the meantime, the company needs to cover it’s expenses regularly. You need to pay rent, vendors and employees. So these payments come out of your reserves, until the invoices pay. The problems start when your reserves dwindle due to growth or slow paying customers.

There are two ways to protect your reserves. One way is to delay expenses so that they come close to matching your invoice payment cycle. The other one is to accelerate invoice payments. Ideally, you want to take both approaches to achieve the most optimal solution.

The most common way to delay expenses is to speak to your own vendors and seek 30 to 60 day terms yourself. If you have been a good client to them, many will be happy to oblige in order to keep your business. However, if you renegotiate payment terms, be sure that you can meet the payments, otherwise you risk losing your vendors. One thing you should avoid at all costs is missing payroll or not paying taxes. If you are at risk of missing payroll, seek the help of an advisor as it’s a sure sign your company is in serious trouble.

There are a couple ways you can accelerate your invoice payment cycle. One is to speak to customers and offer them a discount if they pay quickly. It’s a common industry practice to offer a 2% discount to customers that pay in 10 days or less. If that approach is not sufficient, you should consider factoring your invoices. Invoice factoring accelerates your revenues by using a financial intermediary who advances you funds against your slow paying invoices. The factoring company holds the invoice until maturity and settles the transaction with your company once the customer pays the invoice in full. The factoring fee is based on the factored volume, the credit quality of the invoices and other variables.

One advantage of factoring is that it’s easier to obtain than conventional business financing. The impost important requirement to qualify is to have customers with good commercial credit ratings. It also works well for company whose assets are limited to good quality invoices from credit worthy customers.

Most cash flow shortages require a comprehensive approach of managing both expenses and income in only to ensure the company has sufficient liquidity to cover obligations. Factoring is a tool that can be used to help in this effort.

Disclaimer: This article should not replace competent financial advice. If your company has cash flow problems, please see a professional.

Most conventional factoring transactions are structured as two disbursements. The only exception to this rule is in freight bill factoring where trucking companies can sometimes get a full advance. For most factoring transactions though, the norm is two have two payments/advances. The first advance is made once the invoice is received an can be as high as 85%. The remaining 15% is not advanced and held in reserve until the invoice is paid. Once the invoice is fully paid, the reserve is rebated, less any fees.

So why hold a reserve? The simple answer is that it reduces risk. Although many invoices are paid in full, this is not always the case. There are many industries where charge backs for defects and other situations are very common. This creates a potential scenario where the factoring company could provide an over-advance. Let’s first examine a common transaction.

Assume that the invoice is for $100. The factoring fee is $2 and the advance rate is 85%.

1. The invoice arrives and the factoring company advances $85
2. 30 days later, the factoring company receives the $100 payment from the customer
3. The factoring company rebates $13. ($100 – $85 advance – $2 fee = $13)

Now, let’s look at the same transaction but let’s assume that the advance rate is 98% and that there is a $4 charge back because some items where defective (which can happen).

1. The invoice arrives and the factoring company advances $98
2. 30 days later, the factoring company receive a $96 payment, with a $4 charge back / credit memo
3. The transaction can’t be settled because the received payment is not enough to cover the advance and the fee

The fact that the transaction can’t be settled creates a problem for both the client and the factoring company.  The client will now have to provide funds so that the transaction can clear. To avoid this problem, factoring companies try to set up a reserve that will be enough to cover any potential charge backs and credit memos.

One of the most important characteristics of invoice factoring is that it is one of the few business financing solutions that is self settling (also known as self liquidating). This means that the transaction settles using the proceeds of the invoice – once it’s paid. Because of this, factoring companies need to adjust advance percentages to ensure that the transaction settle properly.