Businesses can factor their outstanding accounts receivable invoices as a way to obtain capital in order to cover business expenses while experiencing growth.
Cash is king and immediate access to ‘cash flow’ is sitting right on top of your desk, tied up in accounts receivable invoices.
Factor Finance 101
Factoring – Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.
Quick Terminology to Know:
- Account Creditor – Usually that means you, or the Business and provider of goods and services
- Advance Rate – The amount of money fronted to the company factoring accounts receivable invoices – as a percentage of the total invoice amount (not the full invoice amount).
- Customer – Referring to ‘your customer’ responsible for paying the outstanding invoice.
- Debt Finance – Capital secured in exchange for a commitment agreement to pay interest in addition to the principal amount borrowed.
- Discount Fee – A fee assessed by the factor finance company that you have an agreement with to purchase your accounts receivable invoices for cash. The discount fee is calculated by the amount of the invoice, the length of time it takes to collect the owed funds and the creditworthiness of your customer.
- Equity Financing – Capital secured in exchange for an ownership percentage interest in a company.
- Factor Finance Company – A company that provides operating capital to business owners by purchasing their open accounts receivable invoices
- Factoring – The purchase and collection of accounts receivables
- Non-Recourse Factoring – A period in which accounts purchased by a factor remain the factor’s accounts and do not revert to the account creditor if unpaid; due to an insolvency event. A factor accepts full credit risk for any and all accounts purchased during this period.
- Recourse Factoring – A period in which accounts purchased by a factor are able to revert to the account creditor if unpaid due to an insolvency event.
- Rebate – Percentage paid back to you, minus the factors fee, once the debtor (your customer) has paid the invoice in full.
- Reserve – Money that is held back as security by the factor to reduce their total liability in collecting the total and full invoices amount from the debtor. [ie., the advance rate + the reserve = 100 percent of the total invoice amount]
Turn your receivable invoices into immediate cash flow by factoring. Factoring is the conversion of accounts receivable invoices into cash by selling those outstanding invoices to a third part (called a factor). Factoring is especially important for companies in early stage development, during rapid growth or even financial hardship.
Factoring will help to fill in the gaps created when your company delivers goods and/or services and when customers finally pay. The time in between is a gap, in which you’ve delivered but not yet been paid.
Many business owners worry that they don’t qualify for factor financing due to; not enough years in business or lack of adequate business credit. Well good news, factors actually base their decision on your customer’s credit history, not yours. If your customers are good creditworthy customers, then your business is most likely a very good candidate for accounts receivable invoice factoring.
Factoring is a simple and fast way to obtain business capital. Your outstanding invoices are considered an asset and you won’t add any new debt on the books by factoring. You can access a portion of your total invoice amount, usually up to 95% of the face value of the invoices. You’ll receive the other 5% of the invoice value, minus the factoring fees when the debtor (your customer) pays the outstanding invoice in full.
With factor financing you’ll be able to obtain cash to help your business without needing personal collateral or increasing interest expenses from other lines of credit you may be using. Remember, invoice factoring is not a loan and will not add debt to your balance sheet. You won’t accrue interest or penalties, like with traditional loans and the factoring fee is clear and agreed to by you and the factor before your first invoice is funded.
Factoring fees can be a flat fee or can fluctuate – so it’s important that you use factor bid when looking for the best factor finance company to finance your invoices, you’ll get a few competitive offers from factor finance companies eager to buy your invoices. Factor bid is free and gives the knowledge and leverage you need to make the best decision for your growing business, and ultimately get the best deal when factoring receivable invoices.
Build your business credit fast with factoring. With predictable cash flow on hand, your business will have access to money to payoff debt, pay overhead, salaries and accounts payables. This will help reduce your business debt, increase on-time payment history and ultimately improve your credit history so you have more options from vendors and other financial institutions moving forward.
Mange your business operations more efficiently and hire employees to help maintain and acquire new customers. Let’s face it, you can’t do all the work! Let professionals help your business be a success today!
There is no reason your business should have to wait to be paid, while your customers use your money to grow their own business. Get paid within 24 hours of delivering goods and services by selling your accounts receivable invoices for immediate cash flow.
Factoring on the Go! Grab our free financing app called Factor App
Factor App for your Apple iPhone
Factor App for your Google Android Smartphone
(Wondering about the terminology 101 and where it may have originated from? look no further – Somewhere along the line, “101” migrated out of academic institutional jargon and into popular mainstream slang.)