Considering Accounts Receivable Financing? 5 Things to Know Before Applying for Factoring

Factoring provides cash to companies all across America, even when banks say no to business loans. Like all business deals, it pays to be prepared.

Save time and money by understanding these 5 areas before making application to factor your accounts receivable:

1. Client Profile

The first step in the process is helping the factoring company get to know your company. This might start with a phone conversation but will eventually be formalized in a client profile form. This provides basic information including:

• Company name
• Contact Information
• Type of business
• Information on your Customers

The nature of the business and type of customers play the leading role in determining whether a factoring company will move forward with the transaction. Most factors are looking for invoices that are owed by a businesses rather than individual consumers.

Other factors specialize in certain types of invoices. For instance construction factoring or medical receivables will only appeal to a company that targets those areas.

2. Aging Reports

The aging report provides the detail that goes along with the initial profile. This report reflects the amounts owed by your customers and the length of time it takes them to pay on the invoices. A customer that pays within 30 days is more attractive than a customer that takes 45-60 days.

3. How it Works

Factoring is the purchase of accounts receivable at a discount. The factoring company provides an advance on approved invoices. The factor handles collection and releases the reserve balance when the customer pays the invoice. The factor deducts their fee before releasing the balance.

4. What it Costs

The first question every business wants to know is, What will factoring cost me?. Don’t be frustrated when the response is, “It depends.” The industry, strength of the customer, and length of time it takes to receive payment affect the advance rate and the discount fee.

The volume of invoices a business plans to factor also impacts pricing.  A company desiring to factor $400,000 every month will receive better rates than a business factoring $15,000 on a sporadic basis. The terms offered by the factor can often be negotiated and will ultimately be spelled out in the contract.

5. Underwriting Process

The factor is very interested in the strength of your customers since they are actually purchasing the account receivables rather than making a loan. The factor will evaluate the creditworthiness and establish credit limits for each customer.

The factor will also perform a public records search on your company to verify there is clear title to the accounts receivable. This search usually includes corporate status, judgments, liens, UCC, pending litigation, back taxes, criminal records, and any other items that might interfere with the factor receiving payment on the invoices.

This due diligence process takes an average of 5-7 days on new accounts. Once the initial review process is complete it can take as little as 24 hours to receive cash for invoices with approved customers.

Factoring provides cash flow solutions to both new and established businesses providing funds for operational expenses, expansion, and growth.

Related Articles:

How Accounts Receivable Factoring Works

When Should a Business Use Factoring?

Five Strategies to Reduce Factoring Costs