Here you can learn more about What is factoring. Factoring companies provide the ideal solution for businesses looking for better cash-flow management. When searching for the perfect company to meet your factoring needs, there are several common questions that should be asked. Some serve multiple industries and some specialize in niche ones; the key is to find the factoring company that can help your business grow.

the perfect factoring company

Industry leader, Interstate Capital, has collated a list of the most important questions to understand what is factoring.

What is factoring?

Factoring is a form of financing, otherwise known as “accounts receivable financing,” that provides businesses with immediate cash for their invoices, without them having to take out a loan. The third party (factor) buys the company’s invoices and then collects on those invoices on the company’s behalf, for a percentage of the invoice.

How does factoring work?

Factoring is not the same as a bank loan; you do not get into debt when you sign a factoring agreement and you do not need collateral to secure the cash; it also does not show up as debt on your balance sheet. Rather, factors focus on the creditworthiness of your clients. The factor first does a credit check on your client and, if they are satisfied, they pay you the majority of the invoice amount, and the balance once your client has paid the invoice, less their fee.

What is a factoring company?

To better understand what is factoring, effectively a factoring company relieves businesses of the stress and worry associated with a restricted cash flow. Factoring companies provide an instant cash solution instead of businesses having to wait 30 to 60 days for clients to pay for services or goods, effectively giving them the opportunity to take on more clients and grow.

What does a do?

Factoring is a centuries-old debtor-financing practice that enables companies to enhance their cash flow and expand their business. Some factoring companies take care of all the associated back-office admin as well, with limited paperwork and documentation required from their clients. Unlike a bank, funds are not restricted and grow as your invoices grow. Several factoring companies give you access to cash needed in as little as 24-hours.

Why should you consider factoring?

Factoring essentially provides a stepping stone towards more traditional forms of finance, such as bank loans. It’s a short-term solution to help businesses boost their cash flow. Consider factoring if you need to free up your cash flow in order to use that capital elsewhere; if you are a small businesses with few assets; or if you are a start-up with no credit history.

When should you use a factoring company?

Companies constantly face peaks and troughs but there are a few definite “signs” that indicate when it’s time to begin using a factoring company: if your customers take a long time to pay and you are struggling to manage your cash flow in the interim; if you don’t have the manpower to do the back-office work associated with collecting on invoices; if you have seasonal cash restrictions; and if you are a new company with few assets and no credit history.

The definition of factoring

Factoring is defined as the process whereby a third party buys a company’s invoices at a discount in order for that company to raise capital. The factor pays the company approximately 80% of the value of the invoice, collects on the invoice on the company’s behalf, and then pays the outstanding balance, minus their factor’s fee. They do not extend credit and, therefore, are not primarily concerned with a business’ creditworthiness – credit is based on sales.

How to choose a factoring company?

When choosing a factoring company, you need to first pinpoint your business’ unique needs. Find a factoring company that specializes in your industry, that way they will know first-hand what tools are required to factor your invoices successfully. Choose experienced factoring companies that have a high customer-service rating and competitive discount and advance rates.

Who uses factoring?

Factoring is accessible to companies ranging from small business start-ups to large corporations in a variety of industries. The following industries commonly make use of a factoring company:

  • Companies working with government contracts
  • Consultants and staffing agencies
  • Finance professionals
  • Food manufacturers and distributors
  • Freight brokers and trucking industries
  • Importers and exporters
  • Janitorial services
  • Security guard companies
  • Manufacturers and wholesalers
  • Oil and gas companies

Who needs factoring?

Factoring is open to any and all businesses, big or small. It provides the ideal solution for companies that are experiencing a tight cash flow; have slow-paying customers; who don’t yet have a credit rating, or for those who don’t have many assets to use as collateral.

The benefits of invoice factoring?

Improve cash flow

Invoice factoring benefits companies that have a limited cash flow and require the capital for other areas in the business that would better increase profitability. For example, companies who use invoice factoring can then redirect the cash flow towards payroll, buying new equipment, restocking supplies, hiring more employees, etc. and generally expand and develop at a much quicker rate.

Quick access to cash

Bank loans typically require a lengthy application process and you could wait months for a bank to pay you. Clients often take 30, 60 or 90 days to pay their invoices. With factoring, you can get access to your cash within 24 or 48 hours.  Once you have applied for factoring services from a factoring company, they will research your clients to determine whether they are creditworthy or not. Once they have established the creditworthiness of your clients, they will be able to give you access to your cash within a very short amount of time.

No extra lines of debt

Many companies want to avoid incurring additional debt to your business. With a bank loan, you would be adding debt to your company. Factoring, however, isn’t a loan so you will not be adding liabilities to your business.

Flexible agreements

Most factoring companies offer very flexible factoring terms. You don’t have to worry about being locked into lengthy agreements and you can cancel a factoring agreement at any time. You can also choose to only factor certain invoices or invoices from specific clients, which ensures maximum flexibility and control over your finances.

Remove pressure from your business

New start-ups and small businesses often experience a lot of stress to meet monthly financial obligations such as supplier fees, payroll and taxes. With factoring, you can ensure that you always have a positive cash flow and that you will be able to cover all your monthly expenses.

Get access to supplier discounts

Having cash in hand gives you negotiating power. When you have cash in hand, you can benefit from greater supplier discounts and offers. You can also use this capital injection to focus on growing your business instead of worrying about how you are going to make ends meet each month.

You don’t need strong financials to get access to factoring

Banks typically research the credit history of a business before they approve a bank loan. This is often problematic for young companies that don’t have a strong financial history. Factoring companies do not look at the strength of your company, they research the financial stability of your clients.

Professional receivable management

When you partner with a factoring company, they will be following up on your outstanding invoices for you. Instead of hiring someone to handle outstanding payments and follow up with clients, you can rest assured that professionally trained people are skilfully handling everything from the tough phone calls to administration involved with receiving and processing payments. Some business owners worry about how their clients will react to being contacted by a factoring company regarding outstanding payments, but this is standard practice in many industries. Not only will this free up your time and resources, but it ensures that you don’t have to take on the difficult phone calls that could damage your relationship with clients.

Extend payment terms and take on additional clients

If you are shying away from larger contracts because you are worried about having to cover you overheads before your client will be able to pay you, then factoring is definitely something that you should consider.  With factoring, you can extend payment terms with confidence and take on larger products because you can rest assured that you will be able to cover your costs and that you won’t have to wait months for payment.

No unnecessary limitations

The money you receive from the factoring company isn’t subject to any spending restrictions or limitations. With a business loan, your spending will often be monitored and you are required to use the money that you borrowed for pre-approved purposes. With factoring, you are free to spend the money as you see fit, whether that means injecting it back into your business or for any other means.

Value adding services

Some factoring companies offer a range of value adding services that you can look forward to. Factoring companies that specialize in the trucking sector, for example, may offer additional benefits such as fuel cards, free credit reports, equipment financing and cash advances on loads in transit. The collection services that they offer is only one of the many value adding services that you can expect. Your best bet is to research the industries that a factoring company specializes in to make sure you are getting extra services that will truly benefit your business.

Factoring versus a bank loan

The main difference between using a factoring company and a bank loan is the flexibility factoring companies offer. Factoring fees are slightly higher than a bank loan; however, factoring offers much more flexibility as there are no restrictions on the amount you can access – as your invoices increase, so does the advance available to you. Similarly, you are not charged interest as you would be by a bank, you do not need to have a credit rating, or any assets, and you don’t get into debt.

Factoring types: Recourse vs. non-recourse factoring

Most factoring companies offer both recourse and options. In a recourse agreement, the client takes responsibility if the invoice does not get paid and buys the invoice back. In a non-recourse agreement, the factor covers the cost if the client does not pay. For obvious reasons, the latter option is more costly.

Factoring agreement

factoring agreement is the document you sign, together with your factoring company, outlining the expectations and requirements of the transaction. The details will vary from factor to factor, but all basic agreements should state who is responsible for what, the fees involved and the processes to follow. 

Factoring rates

The costs associated with factoring are dependent on the discount and advance rates, and the length of the factoring period. The discount rate is what companies are charged to borrow the money, ranging from 0.49% to 5%, based on the original amount of the invoice; Interstate Capital offers competitive factoring rate as low as 0.49%. Advance rates vary, depending on the type of industry involved and the value of the transaction, and range from 70 – 100%.

Are factoring companies regulated?

Factoring companies are largely unregulated; however, associations such as the Commercial Finance Association and the International Factoring Association “self-regulate” factors and monitor and maintain high standards within the industry.

Is factoring an option for small business?

Small businesses are often limited by a restricted cash flow and a factoring company provides the perfect solution to this problem. Ordinarily, small business owners would seek a loan from a bank to bridge the cash gap; however, bank loans are only accessible to clients with a credit history and assets. They also get you into debilitating debt. Factoring companies provides small businesses with interest-free access to cash.

For professional advice and personalized factoring service, and to learn more about what is factoring and what it can provide to your business, you can get a complimentary factoring assessment today.