Is accounts receivable factoring a new financing option?
Accounts receivable funding is one of the oldest forms of financing. It has been around in one form or another for more than 4,000 years. Until the mid 1980s, most people thought accounts receivable factoring was only used in the textile and garment industries. Today, factoring is a widely used and viable financing solution for all types of businesses that extend credit terms to their customers.
How can accounts receivable factoring help my business?
By providing an immediate source of cash flow for your company. You can use this cash to provide working capital, meet payroll, pay taxes, replenish inventory, increase advertising, purchase equipment, improve your credit rating, and more.
How is accounts receivable funding or factoring different than accounts receivable financing from a bank?
When making a funding decision, factors focus on the creditworthiness of your customers, while banks focus on your company’s financial history and cash flow. Plus, since accounts receivable factoring is not a loan, there is no debt on your company’s balance sheet. Best of all, factors will make a quick funding decision, while banks may take weeks – even months – to approve a loan.
Will my company be eligible for accounts receivable factoring if it has a bank loan or line of credit?
If a bank has a lien on your company’s accounts receivable, you should let your potential factoring partner know right away. Factors will ask the bank to subordinate that lien in favour of them. Because this is a common occurrence, most banks will accommodate the request, but this information should be known in advance.
My company owes back taxes. Can I still apply for accounts receivable funding?
Most factors handle tax problems on a case-by-case basis. Let your potential factoring partner know immediately so that they can discuss the payoff of your back taxes or a lien subordination with the IRS.
I have had a past bankruptcy. Is accounts receivable funding still an option?
Yes, most factors will still consider your application even if you have credit problems or a past bankruptcy.
What information will a factoring company need from my company to begin the accounts receivable factoring process?
Along with the application, most factors will ask for your company’s most recent accounts receivable and accounts payable aging reports, Articles of Incorporation or DBA filing, a master customer list and a sample invoice. For startups, a business plan, projected sales forecast, and an owner/office history and profile are generally needed.
Which of my customers would be good candidates for accounts receivable factoring?
Factors will fund all of your credit-worthy customers. When you give the factor your customer list, including name, address, phone number and the amount of credit desired for each, the factor will let you know which customers are eligible for funding. Also, anytime you obtain new customers, provide the information to your factoring partner and they will check them out for you.
Will a factor purchase only a portion of my company’s invoices?
Generally yes, but remember that higher volumes result in more competitive rates. Terms become especially attractive when larger numbers of invoices are issued to a larger pool of customers.
How long does it take to receive the funding?
Depending on the industry, the initial funding usually takes between 1-3 business days after the factor receives your signed contract and the invoices are verified. After the initial funding, your company will usually receive funds within 24 – 48 hours after verification.
Will a factor purchase my outstanding invoices?
Generally yes. Many factors will purchase your current outstanding receivables as part of the initial funding so long as the accounts can be verified and the customer is credit-worthy.
Are accounts receivable factoring fees tax deductible?
Most CPA’s agree that accounts receivable funding fees are an expense and should be treated as such.
Do factors verify invoices with my customers?
Invoice verification is an essential, and accepted, part of factoring. Factors verify invoices to ensure their validity and that there are no offsets or issues that may reduce the expected payment. Most factors have developed verification procedures that ensure that the process is completed quickly and seamlessly.
What should I do if my customer mistakenly sends the payment to my company?
Checks received by you for funded accounts generally must be sent to the factor immediately. Generally, your company should never deposit checks that are from customers who are being funded by a factor. Before factors will fund a customer, that customer will be notified by the factor that payments must be remitted directly to them. Your customer’s obligation to pay the factor for the invoices funded will not be released until the factor has received their payment. Payments deposited by you for funded invoices will not release their obligation.
What happens if my customer doesn’t pay the invoice?
This depends on whether your company entered into a non-recourse or recourse agreement with the factor. In a non-recourse agreement, the factor will absorb the credit-related loss. With a recourse agreement, your company will ultimately absorb the credit risk – either by replacing the invoice with another collectable invoice or having the amount due for the invoice deducted from the next advance or your reserve.
How can I be certain that the factor will treat my customers well?
The factors success is directly related to your success. The last thing the factor wants is for you to lose a customer. Factors are not collection agencies. Reputable factors will not harass your customers for money. Maintaining your customers’ goodwill and confidence are extremely important to the factor.