When To Turn From Banking To Factoring

There is a process where a factor advances a percentage of the amount of an invoice and a reserve held until the company debtor pays the invoice in full. Then the factor pays the company the reserve after deducting the discount fee.

There are three main considerations a company should be able to supply answers to in order to determine whether invoices are able to be factored.

1. What industry or type of business is the business involved with?

2. Underwriters for the factor must determine whether the debtors have good credit?

3. Is there anyone who has filed a UCC-1 on their business?

The reason factors want to know what industry a company is involved with is because some specialize in construction. Other factors specialize in medical receivables. Manufacturing is an industry frequently financed by factoring.

Along with knowing whether the debtor has favorable credit, the factors want to know how long it takes for the debtor to pay invoices. Some factors prefer to factor those who always pay within 30 days. Other factors prefer to factor debtors who take 90 days. Why do they prefer debtors who take 90 days to pay? Often, large companies or the government take 90 days or longer to pay invoices but they are still an acceptable credit risk.

The reason for knowing if there has been a UCC-1 filing is that a factor has to be able to assume the first collateral position on the accounts receivable. Often, when banks have filed a UCC-1, it is possible to get the bank to subordinate the lien on the accounts receivable.

An alternative way of positioning and leveraging a company's financing is to look at factoring as an alternative, time-sensitive and transitional way to finance. When a company is being prevented from growth due to a lack of credit and a lack of conventional funding, it should consider alternative financing such as factoring invoices or purchase orders. If cash flow is the only thing from preventing a company from growing, factoring should be considered if the company does business to business or business to government invoices.

A business that offers a service rather than a product should have a favorable track record in order to be eligible for invoice or purchase order financing. It is perhaps more of a possibility to factor when a business delivers products rather than services. However, factors will consider either or both. But the factor needs to be reasonably sure the company is going to have the integrity to fill service contracts.

Seasonal businesses often have cash flow issues due to fluctuations in number and size of orders. Often, government contracts are for larger amounts but difficult for smaller companies to finance. Again, this would be an ideal scenario for factoring.

It is not required that companies factor all invoices. Furthermore, it is not require that all of the invoices be submitted to the factor immediately after being issued to the client. Perhaps the company has the capability of carrying the accounts for the first 30 days and needing factoring only for those invoices that extend past the 30 days invoice cycle.

The process of applying for factoring is not cumbersome and drawn out. In order to determine whether accounts receivable can be financed, underwriters must look at the aging accounts and accounts payable. Creditworthiness of a company's debtors must be determined by underwriters. When underwriters determine it is possible to factor the company invoices, a proposal is generated discussing the terms and agreement. An initial funding takes about ten days. Thereafter, invoices are paid with 24-36 hours from the time they have been submitted.

One of the greatest features of factoring is that a factoring line grows automatically as the company grows. When a company starts filling more orders and submitting more invoices, the cash flows without having to apply for an increase in funding to meet the size or volume of invoices. The cash has to flow in order for the company to grow.