Factoring Blog

What Happens if you Lie on a Factoring Application?

May 17, 2012 By

It is not usual for companies that are looking for factoring to have cash flow problems. As a matter of fact, factoring is specifically designed to help companies that have cash flow problems due to slow paying customers, so it should be expected. Obviously, some factoring prospects will have less than ideal financial statements. Their balance sheets may be thin, they may be low on working capital, their accounts payable may be challenging, or a whole host of other problems. Because of this, some prospects choose to embellish their factoring applications. While there’s nothing wrong with presenting your best foot forward – and as a matter of fact it’s encouraged – one should never intentionally provide inaccurate information or omit critical details on an application.

This leads to the question – what happens if your factoring application has a number of inaccuracies and omissions? The most likely outcome of this is that your application will be declined. Sometimes, the factoring company may overlook small issues, but they will not overlook big ones. As a matter of fact, most factoring companies will double check information that is on the application against available public record information. This enables them to verify if the prospect has any:

  • Lawsuits
  • Judgments
  • Tax liens
  • Conventional liens
  • Criminal records

Applications have inaccurate information or omissions because of the  business owner’s underlying fear that the application will be declined if they disclose everything. It is possible that the application may be declined if it has substantial negative information. However, it is guaranteed that the application will be declined if substantial negative information is omitted or presented inaccurately. This leads us to her next question – so what do you do if your application is less-than-perfect?

If your accounts receivable factoring application is less-than-perfect, your strategy should be twofold. First, you should honestly disclose all information that the factoring company is asking for. Second, you should approach the factoring company with a plan that shows how you will improve your situation. Since factoring companies are used to working with companies that have cash flow problems, they are likely to be very receptive to this type of an approach. Additionally, they’re likely to respect a business owner who calmly and candidly addresses their problems. And if they don’t you are better off finding out sooner rather than later.

Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. Only a qualified professional can provide that advice and you should seek one if you require it

Filed Under: Factoring

What Is Invoice Factoring Good For?

May 11, 2012 By

Invoice factoring has been gaining popularity as a business financing solution in recent years. However, invoice factoring is still not very well known and considered a type of niche financing. This short article will help you understand two simple questions – what is factoring? and, what is it good for?

Let’s start by describing a common situation for many companies. Companies that sell to other companies or to government entities usually have to offer payment terms. This means that they need to give the customer up to 60 days (or some other negotiated term) to pay an invoice. This can create a problem for small and growing companies because they need to cover the expenses of delivering the service/product immediately. But payment comes in two months. This can be difficult and companies with small cash reserves will find themselves with problems. They will either turn away customers that are demanding terms, or they will offer terms and run into cash flow problems when they realize that they can’t pay their own expenses.

Of course, this would not be a problem if all customers pay quickly. And this is where factoring comes in. Invoice factoring can provide similar benefits than having customers pay quickly. It works by using a financial intermediary, called a factoring company, that advances money to your business and uses your invoices as collateral. The transactions conclude when your customers pay their invoices in full – on their regular schedules.

What makes factoring very attractive to small and growing companies is that it has simple collateral requirements. The most important requirement is to have credit worthy customers. The whole transaction is based on the fact that you can leverage your invoices from credit worthy customers to your advantage. Of course, there are other requirements such as having good invoicing practices, being free of major legal or tax problems, and having a well-run business. However, invoice factoring is available for small and growing companies whose main asset are good customers.

More importantly, factoring is ideally suited for growing companies. The line is adaptive and will increase as your company grows. This ensures that your company has a solid financial footing that enables it to take on new customers. Given that factoring is flexible and easier to obtain than comparable products, it’s considered an ideal solution for growing companies that have working capital problems.

Filed Under: Factoring

How To Get The Best Factoring Rates

May 10, 2012 By

When looking for a factoring plan, cost is one of the most important variables that business owners seem to focus on. This makes sense, because many factoring prospects have cash flow problems, and this makes them very sensitive to pricing differences. However, most business owners think that the most effective way to get the best factoring rates is to call as many factoring companies as they can and submit as many applications as possible. More often than not, this strategy will waste your time and not get you what you want.

From a factoring company’s perspective, rates are associated with risk. This means that if they perceive the client to be risky, they will charge higher rates to compensate for that. However, if they perceive the client to be less risky, they will lower their rates. The right strategy to get the best factoring rates involves doing two things:

  1. Select the factoring company that has experience with your industry
  2. Presenting your company and your application professionally

Determining if a factoring company has experience in your industry is relatively easy – all you need to do is ask them. However, it’s always a good idea to ask some in depth questions to verify that your financing company really knows about your industry. For example, if you’re in the transportation industry, the financing company should be comfortable with all the necessary documentation needed to deliver and accept loads. Additionally, the factoring company should be familiar with all the major shippers and carriers and their procedures. Lastly, it also helps to ask them for references that are in your industry and that have been with the factoring company for at least one year.

Once you have selected which factoring companies you’re going to apply to, the second step is to actually submit the applications. This is where most prospects go wrong. It’s common for prospects to turn in sloppy applications that are hard to read and are missing important information. Most factors see this as a troubling sign and will adjust their  rates accordingly. You should always submit a well-crafted application that is easy to read and has all the required information. If any information is missing, you should make an effort to note that on the application, explain why it’s missing, and advise the factoring company as to when they will receive it.

It is not unusual for factoring prospects to have less than ideal circumstances. Many try to hide this fact from their application. Sometimes they omit details or even critical documents. In other cases, they just enter completely inaccurate information. This can be a serious mistake that will almost always lead to higher factoring rates – or worse – having your factoring application declined. Factoring companies are trained to look for problems and will easily catch any missing information. Additionally, they also do public records searches, which are very helpful in determining if any critical facts have been omitted or are inaccurate.

This opens the final question – what do you do if your situation is less than perfect? Remember that many companies that look for factoring do so because they have growth or cash flow problems. Factoring companies are used to working with companies that have less-than-perfect situations. As long as your situation is workable, there is a very good chance that the factoring company will be willing to help you. The best strategy in these situations tends to be a combination of full disclosure and good planning. You should provide your financing company with a full and honest picture of your situation early on, along with the plan of how you will turn things around. This last point is critical – you must have a plan to improve things. Many factoring companies will react positively to this and will be willing to help you. And if they’re not willing to help you, it’s best that you find about it early on in the process.

Filed Under: Factoring

Is Factoring Financing Right For My Company?

May 8, 2012 By

The popularity of factoring financing has increased in recent years due to the current economic problems. Basically, company owners have been looking for a way to finance their businesses and started to seek out alternatives when business loans became hard to obtain. Although invoice factoring is a very flexible tool it can only help companies that have a very specific set of problems. This article will help you determine if factoring financing is the right solution for your company.

Let’s start by defining factoring. Factoring is a form of financing that helps companies that have working capital problems because their customers are taking up to 60 days to pay their invoices. It provides an advance on the open invoices, providing the liquidity that the company needs to pay operating expenses. By accelerating the revenues that are locked in slow paying invoices, working capital is optimized and companies can focus on growing their sales.

Your company may be able to benefit from factoring if you meet the following criteria:

  1. You have commercial or government customers with good credit
  2. Your customers are taking up to 60 days to pay their invoices
  3. You need working capital to cover operational expenses such as payroll, suppliers, and rent

Invoice factoring has two advantages over other common business financing solutions. The first advantage is that it’s easier to obtain. The most important collateral requirement is to have customers with solid commercial credit and good invoicing practices. The second advantage – and perhaps the most important one – is that the line is indexed to your revenues. The financing line will increase as your sales grow, provided that you meet the factoring financing criteria. This makes it an ideal source of growth financing for companies that have working capital problems that originate from slow paying customers.

Filed Under: Factoring

Types of Factoring

May 7, 2012 By

Every factoring company claims to offer their own unique flavor of factoring financing. While it is true that there are some variations in how factoring is offered by each company, there are really two major types of factoring – they are called full recourse factoring and non recourse factoring. This article will help you understand the differences in these two types of factoring so that you can better decide which one works best for your company.

Let’s start by defining factoring. Factoring is a type of business financing that helps companies that have cash flow problems due to slow paying customers. Most commercial sales – whether selling products or services – are structured to provide the customer up to 60 days to pay their invoices. This is called “selling on terms” or “selling on credit”. This is a common practice in the industry and companies that want to remain competitive have to offer it, otherwise customers will go somewhere else. The problem with offering payment terms is that many companies, especially smaller companies, can’t afford to do so. They need the funds sooner so that they can pay their own expenses.

This is where invoice factoring comes in. A factoring company provides financing using your accounts receivable as collateral. Basically, you get an advance on your slow paying invoices, which provides you with the working capital you need. This type of financing is ongoing but individual transactions settle once each invoice is paid.

The most common type of factoring is called full recourse factoring. With this type of financing, your company is fully liable for any unpaid invoices. If your customer does not pay for your invoice because there is a dispute, they have financial problems, or they simply don’t want to pay, your company has to return the funds to the factoring company. Usually this is done by debiting your reserve account or having you provide a substitute invoice to cover the one that did not pay.

A less common type of factoring, and also the most misunderstood, is called non recourse factoring. Nonrecourse factoring operates in a similar way to recourse factoring with the exception that your company is not liable if your customer does not pay the invoice due to a financial insolvency during the factoring period. In other words, you don’t have to pay the factoring company back if your customer declares bankruptcy or a formal insolvency during the first 90 days from the time that the invoice was purchased (referred to as the factoring period). However, your company is usually liable for any nonpayments due to disputes or any other reasons. Although nonrecourse factoring provides very valuable protection – it is also a very narrow protection. It is very important that you and your attorney examine the factoring agreement so that you understand what protections are being afforded.

Of course, the obvious question is – which one is better? The answer is not as easy as it appears and it’s often the subject of heated debate in the industry. You should go with whatever type of invoice factoring you you think will benefit your business the most. However, bear in mind that most factoring companies will do extensive credit research on your invoices before financing them. Because of this, there is only a small likelihood that they will buy an invoice that has a chance of defaulting. Which brings us to the closing point, one important benefit of factoring is that the factoring company can act as your credit review advisor. And if you use their services correctly it may help you reduce bad debts by ensuring that you only sell to companies that have the best credit quality.

Filed Under: Factoring

What Types of Companies Should Use Invoice Factoring Services?

May 7, 2012 By

The use of factoring financing has increased in popularity in recent years. Although factoring is usually promoted as a very flexible solution, which is true, it should be noted that it can only be used successfully in certain situations. This short article will help you determine whether invoice factoring is the right solution for your company.

Companies go out to the marketplace to get business financing because they have a specific business problem that they want to solve – they need to buy equipment, property, make payroll, pay suppliers, or cover many of the other expenses that companies incur. With this in mind, what is the specific business problem that factoring your invoices will solve? Invoice factoring helps companies that have cash flow problems because they can’t afford to wait 30 to 60 days to get paid by their commercial customers. This problem arises from the fact that most commercial sales are done on terms, which means that you deliver the product/service now, but get paid for it later. Few companies can afford this.

As a rule of thumb, factoring should be able to help your company if the following is true:

  1. You have credit worthy commercial or government customers
  2. Your customers are taking 30 to 60 days to pay their invoices
  3. You need the funds sooner to cover ongoing operational expenses

Some examples of companies that use factoring are staffing agencies that need liquidity to meet payroll, trucking companies that need money to pay for fuel and repairs, distributors that need to pay suppliers, and many other types of businesses that have ongoing operational expenses. Now that we know what problems are solved by factoring and who does it help, the next question to ask is how does it work?

Most factoring transactions are structured to advance money to your company using your invoices as collateral. The factoring company advances anywhere between 80% to 90% of your outstanding accounts receivable as soon as you invoice your customer for completed work. Your company gets the remaining 20% to 10% (less the fee) as soon as your customer pays the invoice on their regular schedule. Basically, factoring accelerates the collection of your revenues in exchange for paying a fee to a financing company.

One of the advantages of factoring over other business  financing solutions is that it’s easier to obtain. Usually the biggest requirement is to have commercial customers with good credit and have a well-run business. But the biggest benefit from factoring comes from its flexibility – the line is indexed to your sales and will increase as your sales grow, as long as you meet the factoring criteria. This makes it ideal for growing companies that have cash flow problems due to slow paying customers.

Filed Under: Factoring

Are You A Good Candidate For Factoring Financing?

May 5, 2012 By

Factoring financing has been gaining popularity in the past few years. While factoring is a very effective product at helping companies that have cash flow problems, it is not for everybody. This article will help you determine if factoring is the right solution for your company. First and foremost, let’s determine the problem that factoring solves. Factoring helps companies that have cash flow problems because their customers are taking up to 60 days to pay their invoices. Because of this, some companies have problems meeting their own operating expenses. Additionally, they also have problems signing on to customers because they can’t afford to offer them payment terms. If used correctly, factoring can fix this.

Usually, your company will be a good candidate for this type of financing if all or some of  following statements describe your situation:

  1. You are having problems making payroll
  2. You are having problems paying suppliers
  3. You are having problems taking on new clients because you can’t offer them payment terms
  4. Your customers have good commercial credit, and lastly,
  5. Your company has good invoicing practices
An invoice factoring transaction provides an advance on your accounts receivable. Instead of waiting up to 60 days to collect your money, a factoring company fronts you the money using your invoices as collateral. This gives you the operating capital to meet ongoing expenses and take on new clients. Factoring transactions are usually structured using two installments. The first installment covers about 80% of your accounts receivable and is provided as soon as the work is invoiced for. The second installment covers the remaining 20%, less the financing fee, and is provided as soon as your customer pays in full.
Accounts receivable factoring transactions differ from other financial transactions in that they use your invoices as the main collateral for the transaction. This is important because from a collateral perspective, the most important requirement is to have credit worthy invoices. This puts factoring within the reach of small companies whose biggest asset is a strong roster of customers.
Perhaps a good way to finish this article is to mention what financial problems are usually not solved with factoring:
  1. You need capital to buy large pieces of equipment
  2. You need capital to buy real estate
  3. You need startup capital to pay initial corporate expenses that are not associated with sales

These problems are better served by other financial products.

Filed Under: Factoring

Import Factoring – Funding For Foreign Clients Selling to US Customers

October 28, 2011 By

Every so often we get a factoring request from a prospect that it’s abroad. It’s usually an enticing opportunity, the prospect owns a company that is outside the US and is selling products to a well known US company. The sale is usually on terms – usually net 30 to net 60. Depending on who you talk to, these transactions are known as either import factoring or as foreign export factoring.

Generally, these transactions follow the same steps as a conventional factoring transaction. The key differences are that the factoring due diligence is different and that getting a security interest over the invoice is more difficult. Because of this, few factoring companies venture into this type of financing. And those that do (we are one of them) only work with select prospects that can meet certain criteria, such as:

  • Minimum of $200,000 monthly sales to the US
  • Solid industry track record
  • Based in Latin America (preferably) or Europe

Most import invoice factoring transactions follow the usual factoring model of advancing the funds in two installments. The first installment is for  70% to 80% of the invoice is given as soon as the product is delivered or work is completed. The second installment, the remaining 20% – 30% (less the fee), is provided once the customer pays for the product in full.

Import factoring can help foreign based companies that are selling in the US in two key ways. First, the import factoring company can provide your business with valuable funding. Second, the factoring company can help you determine the creditworthiness of your US clients, enabling you to offer payment terms only to those clients that have good credit.

 

Filed Under: Factoring Tagged With: ,

Small Business Factoring – Small Ticket Factoring

October 25, 2011 By

In general, small business owners have traditionally had a hard time finding business financing. Conventional financing is usually not an option for them because most banks like to make larger loans - usually beyond the reach of the common small business owner. However, a new breed of invoice factoring program has been gaining popularity with small business owners. These new programs specifically offer small business factoring programs – also called small ticket factoring plans.

Small business factoring programs are different than conventional factoring program in one key way – they impose no factoring minimums. Most factoring companies like to work with companies that are of a certain size – $50,000 in monthly sales is a common requirement. Small ticket factoring companies are different – they work with companies that are smaller and have LESS than $25,000 in monthly sales. They specialize in working with small businesses – usually single office companies with less than 4 employees.

One thing to bear in mind is that small business factoring programs are more expensive than conventional factoring programs. There are two reasons for this – volume and work. Small companies generate small volumes but also more work for the factoring company, which is why their fees tend to be higher.

However, qualifying for small ticket factoring is relatively easy. You need to work with solid customers – because their invoices will be the collateral. Aside from that your company needs to be free of legal and tax problems.

 

Filed Under: Factoring

The Importance Of Building a Cash Reserve For Your Business

October 21, 2011 By

For small business owners – cash is usually tight. There are expenses that have to be met quickly and customers that pay slowly. This combination makes it hard for business owners to build a reserve – even if it’s a small one. However, having a cash reserve is critical if your business is going to survive and grow. Without a cash reserve, your business runs the risk of becoming a casualty if there is an unexpected bump in your cash flow.

Many business owners pride themselves of running a tight ship by carefully managing their income and their expenses. The problem is that sometimes things are run so tight that a small unpredictable ripple – say a few late payments by customers – can send the whole business into a tail spin. This can quickly spiral out of control – especially if you miss payroll or key supplier payments.  One way to address this problem is to have a cash reserve that can be used for emergencies.

The size of the cash reserve is a matter of much debate by experts. Some recommend a few months worth of business expenses –  while others suggest you should have 6 months or more. In reality – you and your advisers will need to pick the number that is right for your company. Additionally, you have to take into consideration that cash that is sitting in the emergency fund is not producing returns for your company since you are not investing it in the business. Regardless, it’s usually a good idea to build a reserve, even if  it’s done slowly and have to build it little by little. In this case something is better than nothing.

One approach to managing this problem is to combine a smaller cash reserve with a business financing product – such as a business loan or invoice factoring. This enables you to free some funds from the reserve and use them to grow the company and the added financing increases your ability to weather problems. This strategy of using business financing as part of your reserves can be useful if your cash flow problems are caused by slow paying customers. It will not necessarily be very useful if your cash flow problems are caused by slowing sales. This last point is very important.

Factoring is one tool that enables you to handle cash flow problems that are created by slow paying customers. It accelerates your revenues, providing predictable cash flow and minimizing problems from slow paying customers. When used in combination with a proper cash reserve, it can be a great tool to help you weather cash flow shortages.

Disclaimer: This article does not provide financial advice. If you need advice, please consult an expert.

Filed Under: Factoring Tagged With: ,

How To Use Factoring To Grow Your Business

October 20, 2011 By

Ever since the financial crisis of 2008 payment terms have been getting longer. Customers that used to pay in 30 days are now demanding 45 days to pay. Those that used to pay in 45 days are now demanding 60 – some even go as far as demanding 70 or 80 days to pay. This presents a big problem for many small businesses because many cannot afford to wait that long to get paid. Because of this, many small businesses are forced to turn away those opportunities. For many, this makes a bad situation worse.

One possible solution to this problem is to use invoice factoring. Invoice factoring accelerates your revenues through a factoring company and eliminates having to wait up to 90 days to get paid by customers. The factoring company advances revenues due to you from your invoices for a small fee. The transaction is settled once your customer pays the invoice in full by your customer.

To work effectively, you would clear the transaction with the factoring company ahead of time, and then make the sale (or provide the service) to the customer. Once you complete the work, you can invoice the customer and sell the invoice to the factoring company. This would provide you with the immediate advance while the factoring company holds the invoice until payment. Ideally by using this process repeatedly you could grow your company by taking on clients that you could have not afforded in the past.

Qualifying for factoring is relatively easy – at least when compared to other types of business financing products. You need to invoice solid clients – because factoring companies only finance invoices that are payable by companies with good commercial credit. Also, your company needs to be free of legal and tax problems.

Disclaimer: This article doe not provide financial advise. Please consult an expert if you need legal or financial advice.

Filed Under: Factoring

What is Spot Factoring?

October 19, 2011 By

Spot factoring is a type of factoring where your company gets to factor a single invoice. From a factoring company perspective, this type of invoice factoring is riskier so only a few companies offer it. And those that do, charge higher rates to compensate them from the risk. Most clients that use this type of factoring do so because they had a single event – such as a big contract or a big sale – that threw their finances into a tail spin. Spot factoring gives them the opportunity to keep operating smoothly.

Why is spot factoring costlier and riskier than conventional invoice factoring? To understand this, you need to put yourself in the shoes of a factoring company. First, spot factoring is costlier than conventional factoring simply because the factoring company has a single invoice to make their revenue from, rather than a stream of invoices. Second, the cost of setting up and operating the account has to be built into a single invoice – rather than spread through a stream of invoices.  Those two points account for a large part of the price difference.

Lastly, spot factoring is riskier simply because if something goes wrong with the invoice – such as an issue with the service to product – the factoring company won’t be able to fall back on other invoices to recoup their loss. They only have this single invoice as collateral. The industry perceives this as substantial risk,  which contributes to a higher price.

Filed Under: Factoring Tagged With:

Recourse Factoring vs. Non Recourse Factoring

October 18, 2011 By

We have recently written articles about non recourse factoring and about recourse factoring and wanted to opportunity to make a side by side comparison of the products. This should better help you decide which one is better for you. We’ll start by saying  that the subject of recourse and non recourse factoring is one of the most misunderstood of the industry. We think it’s a combination of the fact that the term non-recourse is used in other financial products and has a very different definition. We hope that this short article clears this up and help you in deciding which product is best for your company.

Non-Recourse Factoring

A commonly accepted definition of non recourse financing is “a loan that is secured by collateral – where the lender can only pursue the collateral - and not the borrower – in case of default.” Most people read this or something similar and assume that it applies to factoring in the same way. They believe that in non-recourse factoring, if the customer does not pay the invoice for whatever reason, they will be protected against the loss because the factoring company will absorb it. For the most part – this is a wrong assumption.

In most cases of non recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay the factoring company back unless the end customer declares insolvency within those 90 days. This is a very important detail: the non recourse invoice factoring program only protects you if the invoice is not paid due to a customer insolvency and only if the insolvency happens within the 90 day period.  For example, if a customer does not pay the invoice because they have a dispute or are simply low on funds – you will most likely still be liable to the factoring company after 90 days. Note that the implementation of non recourse factoring varies by factoring company – but most use a version of the model described in this article.

Recourse Factoring

This type of factoring is a lot simpler. In recourse factoring, an invoice is factored with the expectation that the customer will pay the invoice in 90 days. If the customer does not pay the invoice within 90 days, the client has to pay back the factoring company.

Which is better – Recourse or Non Recourse Factoring?

This is difficult to answer since it depends on what you are looking for. But keep this in mind, regardless of which factoring plan you get, all factoring companies check the credit of your invoices thoroughly before advancing  any funds. This provides your company (and the factoring company) with a level of credit protection since it will likely root out any problem invoices. However, a non recourse factoring program will also protect you against an unexpected customer default. Although rare, these do happen and non recourse factoring offers some protection against it. Ultimately, your best bet is to review your factoring options with a competent CPA or attorney who can advise you specifically as to which plan is best for you.

Disclaimer: Each factoring company offers their own version of recourse or non recourse factoring and you should seek professional help when evaluating factoring opportunities. This article is not intended as legal or financial advise.

Filed Under: Factoring Tagged With: ,

Is Invoice Factoring Right For Your Company?

October 6, 2011 By

In this article we will help answer a common question we get from prospects – is invoice factoring right for my company? We’d like to start by saying that each situation is different and that this article does not intend to give legal or financial advice. If you need business financing, you should consult a professional to help you determine what is the right solution for you.

Invoice factoring solves one simple problem – cash flow shortages created by slow paying customers. Let’s say your company works with credit worthy commercial clients – and as it’s common – these clients pay their invoices in 30 to 60 days. For many large companies this is not a problem because they have substantial cash reserves that can be used to cover expenses. On the other hand, this can be a big problem for small companies that don’t have cash reserves. Why? Because many small companies have a number of immediate expenses that have to be paid – rent, suppliers and payroll – for example. Missing one of these payments can get the company in serious problems. This is where factoring comes in. Factoring can finance your slow paying invoices, providing the funds you need to meet expenses without having to worry about slow paying customers. In a nutshell, factoring works best for companies that can’t afford to wait up to 60 days to get paid by their customers.

On variable that you should definitely take into account when deciding about factoring is the issue of cost. Factoring is more expensive than most other financial solutions, which is why it is best if it’s used with transactions that have high profit margins. Generally, factoring will be right for your company if you can answer ‘yes’ to the following questions:

  1. Would your company be better off if your customers paid quickly?
  2. Have you turned away good prospects just because they paid in 60 days?
  3. Do you have high profit margins?
  4. Is your company profitable?
Filed Under: Factoring Tagged With: ,

What is Non-Recourse Factoring?

September 22, 2011 By

Non-recourse factoring is one of the most misunderstood subjects in the field of factoring finance – perhaps because use of the word non-recourse varies across the finance industry. Let’s first start with full recourse factoring agreements, since they are the simplest to understand. In a recourse factoring agreement, the client agrees to buy back the invoice  from the factoring company if the invoice is not paid within the factoring period – usually 90 days. Said simply, your company buys back the unpaid invoice after 90 days regardless of the reason for non payment.

Non-recourse factoring is a little bit more complex because each factoring company implements their own version of it. You should ask your factoring company if they offer it – and if they do – inquire as to what is covered under their non-recourse agreements. But for the most part, in a non-recourse factoring agreement, the client does not have to buy the invoice back if (and only if) the invoice is not paid due to a customers declared financial insolvency and if (and only if) the insolvency happened during the factoring period. As you can see, there are a lot of conditions in this definition.

The first conclusion that you can draw from this non-recourse factoring does NOT offer a blanket protection against customer non-payment. Not even close. It only offers protection against certain types of client insolvencies. This means that an invoice could be sold back to you if there is a dispute or if your client is unwilling to pay, except due to an insolvency.

One thing we’d like to add is that factoring companies are quite good at evaluating customer credits and do their best to avoid buying invoices from companies that are in financial problems – irrespective of your type of factoring agreement. So using your factoring company’s credit evaluation facilities should offer some protection in itself.

Lastly, please note that each invoice factoring company offers recourse/non-recourse factoring in their own way. You should have an attorney review your agreement and explain all the details to you before engaging the factoring company.

 

Update: Here is a side by side comparison of recourse factoring vs. non recourse factoring.

Filed Under: Factoring Tagged With: ,

What is Recourse Factoring?

September 22, 2011 By

Most factoring companies offer invoice factoring with full recourse. This means that your company has to return the advance (and sometimes pay fees) if your customer does not pay their invoice within the specified factoring time frame - usually 90 days.  The two most common reasons why factoring companies exercise recourse and return the invoices to a client are customer disputes and credit problems. This is one of the reasons why factoring should be used as a tool to accelerate your cash flow and not as a tool to handle old or un-collectable invoice.

Let’s explore the two most common reasons for recourse in more detail:

  • Customer disputes: Invoices that are not paid on time because of a customer dispute represent the vast majority of invoices that are returned to clients. Sometimes these disputes are the result of a small misunderstanding. Other times, there are the result of huge misunderstandings. Regardless, your factoring company is not in a position to be the judge or arbiter in this situation which is why they sell the invoice back to your company. Most invoice disputes can be prevented by good communication and setting proper expectations with your customer.  Additionally, using a verification letter can help you minimize invoice disputes.
  • Credit Problems: Invoices that don’t pay due to client financial problems are also subject to recourse. However, these represent a small portion of the total invoices that are subjected to recourse because factoring companies are good  at evaluating credit profiles and usually don’t purchase invoices from customers with a slow or bad payment record. There is a form of factoring that offers some protection against customer credit defaults – it’s called non-recourse factoring.

Factoring agreements can be complex documents – because of this you should consult a competent lawyer before entering into an agreement with a factoring company.

 

Update: Here is a side by side comparison of recourse factoring vs. non recourse factoring.

Filed Under: Factoring Tagged With: ,

Factoring Old Invoices

September 22, 2011 By

One common misconception is that factoring companies buy old invoices. This is actually not true. Factoring companies by slow paying invoices from credit worthy customers, which helps your cash flow. Factoring companies don’t buy old invoices.

By our definition, an old invoice is any invoice that is 90 days past terms is considered to be “old”. Most companies consider these invoices to have very little chance of getting paid – in other words they are collection problems. While it’d be great to be able to sell those invoices, you’ll find that there is a limited market for them – mostly collection companies. These invoices are best handled by a collections lawyer.

So, why would you  factor an invoice? And, what invoices can be factored?

Factoring is a financial tool that is used to accelerate the payments from slow paying but credit worthy customers. For example, it’s common for small companies to sell products/services to larger companies and offer then net 30 payment terms. This gives the larger company 30 days to pay their invoice. However, it’s not unusual for customers to pay their invoices a few days past due – say in 40 days (or even 50 days) rather than 30 days. In this case, a factoring company can help you by advancing funds against your slow paying invoice. This gives your company the necessary funds to meet it’s current obligations and relieves the pressure from having to wait until your customer pays. The transaction is settled once your customer pays the invoice in full. The two key points to remember are the the invoice is payable in 30 to 60 days and the invoice is payable by a credit worthy commercial customer.

In summary – invoice factoring is a tool that you would use to accelerate your cash flow from credit worthy customers and not a tool that you can use with commercial customers with credit problems.

Filed Under: Factoring Tagged With: , , ,

Should You Factor Customers With Collection Problems?

August 24, 2011 By

The short answer is – no. It’s not uncommon for companies to want to factor their problem customer accounts. The obvious logic is that if you can shift the credit risk to another business – why not do it?  The fact of the matter is that factoring companies are good at analyzing credit and they would probably catch invoices from problem customers before buying them anyways. And if they bough it, it would end up being a very expensive proposition for the client because factoring fees increase over time – so the longer a customer takes to pay the more expensive it is for you. To add to it, many factoring contracts have a clause that requires a client to purchase invoices that are not paid within 90 days (this varies). So to sum it up, selling invoices from problem customers to a factoring company is always a bad idea.

If you have a problem customer, your best bet is to speak to an attorney or an expert in collections.  However, if you are an invoice factoring client you should leverage your factoring company’s credit expertise and ask them to help you review the credit quality of your customer portfolio. A good factoring company will review your portfolio with you and help you flag customers that are collections problems – or that could turn into collection problems soon. This helps you minimize the chances of selling to problem customers in the first place – which is the best way to avoid collections problems.

A factoring company can also help you with the cash flow problems that are created by good customers that pay slowly. It’s common for companies to be paid on net 30 to net 60 days. Many small businesses can’t afford to wait that long for payment. They have many immediate obligations to meet – supplier payments, rent and payroll – and few reserves to cover such expenses. In this case, a factoring company can advance funds against your slow paying invoices from good customers, providing you with the liquidity you need to pay expenses and go after new opportunities. One big advantage of factoring is that it’s easier and faster to obtain than other solutions. Because of this, factoring has been gaining popularity in recent years as an ideal solution for small and midsized companies.

Filed Under: Factoring Tagged With: , ,

Invoice Factoring – What Are Invoice Verifications?

August 22, 2011 By

In a conventional invoice factoring transaction, the factoring company buys your invoices for an upfront payment. Now, when someone buys a tangible good (such as a home, a car or groceries) one can look at the goods before purchase to determine whether they are good or not – the goods are tangible. On the other hand, you have invoices which are intangible. They are financial obligations basically printed on a piece of paper or stored in a computer file. You can’t examine these obligations just by looking at the invoice.

This leaves factoring companies with a problem because just like any buyer, they want to make sure they are buying quality invoices (or “product”). The only way they can do this is through the invoice verification process. When verifying an invoice, most invoice factoring companies are concerned about three things:

  1. Is the invoice amount correct
  2. Where they goods/services delivered on time?
  3. Are the goods/services acceptable?

Most factoring companies verify invoices by sending an email to the accounts payable representative of the customer. Email is ideal because it’s not intrusive and it also leaves a written record of the communication. Others factoring companies prefer to handle verifications by telephone, mostly because it’s less impersonal than email. Lastly, some verifications require a customer signature – these are done by fax.

Factoring clients, understandably so, are usually concerned about invoice verifications because of the potentially negative effects it could have on the customer relationship. While it is true that most factoring companies handle these issues professionally, there is always the possibility that a customer relationship could be affected. Because of this, you should always ask a factoring company about their invoice verification procedures and you should be comfortable with them before you sign on as a client.

Filed Under: Factoring Tagged With:

Business Financing for Subcontractors in the Oil and Gas Industry

August 18, 2011 By

Most subcontractors in the oil and gas industry have enjoyed a number of good years, despite the recession. However, many large oil and gas clients have grown more conservative in the expenditures and have started to take longer to pay their invoices. Companies that paid in 30 days are now paying in net 45. Those that used to pay in net 45 days are now paying in net 60 days. This has created a challenge for many of the smaller providers, who don’t always have the resources to wait a long time to get paid.

Smaller subcontractors in the oil and gas industry have been focused on growth and don’t always have the necessary cash cushion to absorb slow invoice payments. This puts business owners in a difficult position where they have to  deal with their cash flow problems by either delaying expenses or asking customers for prompt payment. These strategies usually work – at least for a while. However, delaying expenses and demanding quick payments won’t always work for the long term. A better solution is to bridge the cash flow gap using business financing.

There is a solution that has been gaining notoriety in recent years that is designed specifically to fix the cash flow problems created by slow paying invoices – it’s called invoice factoring. It enables small businesses to get quick payment for their invoices, providing the needed funds to meet current expenses and new growth investments. Factoring is specifically designed for small businesses so it’s easier and faster to obtain than conventional financing.

Factoring works by using a financial intermediary, called a factoring company, that buys your invoices and pays you upfront for them. This gives your company the funds it needs to operate while the factoring company holds the invoice until the customer pays. Once the customer pays, on their usual schedule, the transaction is settled. A key feature of factoring is that your customer does not have to pay sooner – they pay on their usual terms.

Qualifying for factoring is relatively easy. The biggest requirement is that your company needs to work with credit worthy customers. Most of the larger operators in the oil and gas industry have stellar credit, so this should not be a problem. Aside from that, your company needs to be free of legal and tax problems. Most factoring companies can approve a factoring line for initial funding in about a week or two.

Filed Under: Factoring Tagged With: , ,
« Older Posts

Copyright © 2002-2012 by Commercial Capital, LLC - All rights reserved
1 (866) 730 1922

USA Factoring USA Canada Factoring Canada