In the past, financial relationships were largely with your own personal banker. Nowadays, your car loan may be from a completely different financial institution than your home loan, business credit line, or credit cards.

The reason being is that, with competition, you are able to get specialized service and better pricing.

For the most part, Bank Factoring and a Factoring Company will have similar pricing, but price is not your only consideration.

A full-service factoring company comes out on top when you think of what additional benefits you receive…

Speed – Most banks are not known for their quick turn around. Factoring companies will typically fund the same day or within 24 hours. Factors use a lot less paperwork.

Credit Help – Today’s factors do more than buy your receivables. They can check out your prospective clients credit and help you avoid bad accounts.

Collection – A full service factor will supply you a collection expert. These people are good at what they do. They know how to maintain the credibility of your business, and also collect some money!

Collateral – Although banks suggest they are only interested in the receivables, they will also typically require a secured position in all your assets as security. This can be very problematic when you need additional funds and the bank has tied up your collateral. A Factor will usually only use the actual invoices as security – enabling you to continue to run your business as you see fit.

Flexibility – Face it, banks are not flexible. Today’s full service factors have to be flexible to compete with each other. They can think outside the box and most deals, unlike a bank, are not “pass or fail.” A factor will try to find a way to make the deal work for you.

All things considered, you are typically much better off dealing with a full-service factor than going to a bank that just happens to “also offer” factoring services.

For more information on improving cash flow with factoring be sure to read Unlocking the Cash in Your Company – How to Get Unlimited Funds Without a Loan!

Well, this article is for you!

What is factoring?

Factoring is the sale of accounts receivables or invoices at a slight discount.

How does it work?

You set up an account with a Factor. Once set up, you send the new invoice to the Factor who then cuts you a check for the agreed upon percentage, referred to as the advance. Read More…

How much does it cost?

The factoring fee depends on the strength and performance of the accounts. For the most part the fee will be between 2-5%. Read more…

How long does it take?

Setting up an account can take 5-10 days. Once the account is set up an advance is typically funded within 24 hours of invoice submission.

Do I have to factor all my accounts?

Not unless you are looking for a “one time” shot. Otherwise you pick and choose which invoices you would like to factor.

How long do I have to work with the Factor?

There is no set time. The average business may factor for 2-3 years but some companies continue on indefinitely.

What if I have poor credit?

For the most part the factor is looking at the strength of the payer (your customer), not you or your business.

What happens if my customers don’t pay?

That depends on how you set up the transaction with the Factor. If it is “non-recourse factoring” then you may not be responsible. If it is “recourse factoring” then you will need to repay or replace the bad invoice. Read More…

What if I have a bank or tax lien?

Oftentimes the factor can work with the bank or tax entity to have them subordinate their position. If there are enough receivables you may even be able to pay off the loan or tax obligation. Read More…

How can I get started?

There are numerous great factoring companies right here at FactoringInvestor.com. We recommend that you “interview” more than one to see which company may best fit your needs. Read More…

What if I want to learn more?

There is a lot of great information on this site. There are also many in-depth resources available from a variety of authors. Check out the “Resources” section of FactoringInvestor.com. Read More…

In some cases a company may still be eligible to work with a full-service factor and realize the benefits of factoring.

For starters, oftentimes banks may not have used the current receivables as collateral. If there is no lien on the receivables being factored than a company is free to sell them as the owner sees fit.

Secondly, depending on the situation, if the bank does have a lien oftentimes they are willing to subordinate once the bank understands the situation.

The other alternative is to pay off the existing loan. This requires enough receivables to leverage the buy out, but it may be an option.

Believe it or not, many referrals actually come from loan officers that were unable to provide additional help to their banking clients. Many lenders are very familiar with “interim factoring” and welcome the help.

Tax liens work in much the same way as working with a bank. They are handled on a case-by-case basis.  Remember the government wants to get paid as well. They have been known to subordinate their position to help improve their chances of receiving payments on back taxes.

Having a bank loan, line of credit, or tax lien may not exclude you from the benefits, and financial freedom, of utilizing a full service factor. Just be sure to mention the situation upfront when making application to factor accounts receivable.  This will help set the stage for good working relationships and avoid delays or confusion during the due diligence process.

Since the overall goal is improved cash flow, a company considering accounts receivable financing will carefully weigh the benefits against the costs. Here are five ways a business can reduce or offset the cost of factoring and still improve cash flow:

Strategy #1 – Early Payment Discounts

Use the money to take advantage of early payment discounts offered by suppliers and service providers.  A standard early payment discount is 2/10 net 30.  In this scenario the vendor will provide a 2% discount if the bill is paid within 10 days, with the full amount due in the standard 30 days.  While the savings might seem small ($2.00 for every $100), over time it can really add up.  It will also help offset the discount fee charged by factoring companies. If you don’t see an early pay discount on the invoice, then ask!

Strategy #2 – Bulk Purchasing

A supplier will often provide a reduced price for bulk purchases.  If you can order 500 widgets for $1.00 each or 1,000 for $0.75 each it makes sense to take advantage of bulk pricing since this can equate to a savings of 25%, or more.  Just be sure to purchase items the company is certain to need and utilize.

Strategy #3 – Target Fast Paying Customers

Time is Money and the length of time it takes a customer to pay on the invoice has a direct relation to the cost of factoring.  The discount fee charged by the factoring company goes up the longer it takes your customer to pay.  By targeting invoices with customers that normally pay quickly a company can reduce their factoring cost.

Strategy #4 – Delay Invoice Submission

Another way to make the “Time is Money” principal work for your business is to first age the invoices for 10-20 days before submitting to the factoring company for a cash advance.  Even customers that typically pay in 45 days can be turned into 30-day customers by first aging the invoice for 15 days prior to factoring.  Policies on this strategy can vary by factor so discuss the parameters upfront.

Strategy #5 – Increase Growth and Profit

If a company can increase profits by an amount greater than the cost of factoring it can make economic sense to consider this business financing option.  An increase in working capital can provide the funds it takes to accept and fill another order.  Additionally, it can contribute to increased profit margins since many overhead costs are fixed and may not incrementally increase with the cost of goods.

When a company wants to increase cash flow by factoring accounts receivables the impact of the factoring cost can be greatly minimized.  Just be sure to consider these 5 cost reducing strategies that pay close attention to the timing of invoices and how the factoring cash advance is spent.

Related Articles:

When Should a Business Use Factoring?

How to Factor on Small Margins

About the Author:  Tracy Z. Rewey is a 20 year veteran of the cash flow industry, respected author, and recipient of the ACFA Million Dollar Club Award and the DBAA Lifetime Achievement Award.  She helps businesses and brokers solve cash flow needs.

This leaves many businesses to wonder, “What’s the difference? Is it really apples and oranges?”

Actually, the fruit analogy works here. Factoring and Asset Based Lending (ABL) are both types of financing (or fruit, if you will) offered by specialty business financing companies. They commonly involve funding based on receivables but the differences come down to the variety of financing.

Asset Based Lending

The asset-based loan is just that – a loan. The company borrows money incurring loan fees and interest charges. The loan is collateralized or backed by assets of the business. This can include the account receivables but can also extend to other assets including inventory, raw materials, equipment, patents, or fixed assets.

Factoring

Rather than a loan, the factoring transaction involves the purchase of the invoice itself. The factor buys account receivables at a discount through a cash advance. All or a portion of the reserve is released upon payment of the invoice by the client’s customer. Instead of earning interest the factor earns a discount or factoring fee.

All in the Family

When an asset based loan is secured just by the accounts receivable the distinction between the two can become blurred. Both the lender and the factor usually verify invoices and use some sort of lock-box system to accept payment on the invoices.

The costs can vary greatly so neither factoring or ABL can be deemed the most or least expensive. It is safe to say that specialty financing is generally more expensive than traditional bank financing. It is best to shop around and compare the costs and benefits of both options.

Factoring and asset based lending can both be categorized as types of asset based financing, with the big difference being an asset loan versus an asset purchase at a discount. At the end of the day, both can be a tasty option if it fills the company’s appetite for working capital at a cost that still enables growth and profit.

Here is an alternative solution to consider when a company does not want to discount invoices or doesn’t qualify for factoring.

It is a common problem…

A business delivers the goods or services, invoices the customer, and waits for payment. A business could demand payment upon delivery but many customers might take their business elsewhere. Rather than waiting 30, 60, or even 90 days many companies decide to sell or factor their invoices for an immediate cash advance.

However some companies do not want the expense of factoring or don’t want their customers notified of the factoring transaction. Others might want to factor but their invoices don’t qualify.

Rather than factor invoices for a discount, enterprising companies turn to their customers. By offering the customer a discount for paying the invoice early a business can receive payment faster. Rather than punishing a customer for late payment they are rewarded for timely payment.

A common approach is to offer terms of 1%/10 days, net 30. This gives the customer a 1% discount from the invoice amount if it is paid within 10 days. After the 10th day and up to the 30th day the full invoice amount is due. After the 30th day a late fee might be incurred.

A tiered approach can also be effective. For instance, a 4% discount if paid within 10 days and 2% if paid within 20 days offers a more aggressive incentive for a longer period of time. As long as the discount is less than the factoring fee the business and the customer have an opportunity to benefit.

Of course offering early payment discounts can affect the bottom line and demand additional time in managing account receivables. Plus, not all customers will take advantage of paying early causing unpredictable fluctuations in cash flow. In addition to reliability, a factoring company can provide credit and risk analysis when deciding on whether to extend terms to a new customer.

Offering early payment discounts to customers is one accounts receivable management tool that can be an effective alternative or addition to factoring. An experienced accountant or consultant can assist in weighing the cost versus reward benefits.

In fact over one third of banks surveyed by the Federal Reserve in April 2009 have reported a decline in credit line and credit card limits for businesses.

Accounts receivable factoring supplies an alternative solution by providing a cash advance on outstanding invoices.  Since it involves the sale of an asset at a discount rather than a loan, it can provide a viable financing option as banks continue to tighten their business lending.

Here are three ways to know if your company could benefit from discounting invoices to a Factor:

1.  No Longer Have Enough Conventional Financing – Factoring is considered specialty financing making it generally more expensive than conventional bank loans.  It might seem obvious but if a business has sufficient financing through traditional bank channels than selling invoices isn’t really necessary.  But when banks say no or existing credit lines dry up the only alternative might be the funding factoring provides.

2.  Need Quick Short-Term Working Capital – When suppliers are demanding payment or payroll is looming, obtaining an advance on outstanding invoices can provide a quick infusion of cash.  The initial application process can often be completed in under a week and once approved most factors can fund qualified invoices in 24 to 48 hours.

This makes it a common financing arrangement for some industries like manufacturing or temporary staffing.  For instance, a staffing agency is often in the position of paying their temporary workers on a weekly basis but payment on the contracts could roll in two to four weeks later.

3.  Potential Growth Profit Outweighs Cost – When a business has an opportunity to grow the cost to factor can make economic sense.  For instance, ABC Widgets sells product at an 18% profit margin and has the opportunity but not the funding to expand business.  Initially it might seem expensive for them to pay the 3 to 5 percent discount fee a factor charges.  However, if ABC Widgets can now transact more business at the 18% profit margin they will still realize 13 to 15 percent in additional profits for the increased business.

The entrepreneurial spirit of the small business owner is a key component in paving the road to economic recovery. Factoring accounts receivable can provide an alternative cash flow solution to provide the working capital it takes to get the job done.

This business financing solution enables a company to receive an advance on a single outstanding invoice.

While traditional factoring arrangements are often structured on the expectation of monthly reoccurring business, spot factoring can be a one-time transaction. Also known as single invoice factoring, the business can obtain the working capital they need without lengthy contracts or ongoing commitments.

A Factor will review the invoice, confirm the goods or services have been delivered, and underwrite the credit worthiness of the debtor. Once the factor is satisfied they will advance a percentage of the invoice to the business, generally 70 to 90 percent of the amount billed. The balance is kept as a reserve to be released upon payment of the invoice less the factoring fee.

Since the transaction is based on a single occurrence a company offering spot factoring is likely to set a minimum invoice amount to make the accounts receivable purchase worth their time, effort, and investment.

While a factor might hope for future business, there is no obligation for the client to use these services in the future. This makes single invoice factoring a viable business financing strategy for companies that do not use or expect to use factoring in their normal course of business.

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