FA C T O R I N G G U I D E
What is factoring?
Factoring is a form of financing, otherwise known as
“accounts receivable financing,” that provides businesses
with immediate cash for their invoices, without them having
to take out a loan. The factoring firm buys the company’s
invoices and then collects on those invoices on the
company’s behalf, for a percentage of the invoice.
How does
factoring work?
Factoring is not the same as a bank loan; you do not get
into debt when you sign a factoring agreement and you
The definition of factoring
Factoring is defined as the process whereby a third party
buys a company’s invoices at a discount in order for that
do not need collateral to secure the cash. Rather, factoring
professionals focus on the creditworthiness of your clients
company to raise capital. The factoring firm pays the
company approximately 80% of the value of the invoice,
collects on the invoice on the company’s behalf, and then
pays the outstanding balance, minus their factoring fee.
They do not extend credit and, therefore, are not primarily
and, if they are satisfied with your client’s payment history,
the factoring firm pays you up front the majority of the
invoice amount. You receive the balance once your client
concerned with a business’ creditworthiness – credit is
has paid the invoice, a small factoring fee.
based on sales.
What does a factoring company do?
Factoring is a centuries-old debtor-financing practice that
enables companies to enhance their cash flow and expand
What is a factoring company?
their business. Some factoring companies take care of
A factoring company relieves businesses of the stress and
all the associated back-office admin as well, with limited
worry associated with a restricted cash flow. Factoring
paperwork and documentation required from their clients.
companies provide an instant cash solution instead of
Unlike a bank, funds are not restricted and grow as your
businesses having to wait 30 to 60 days for clients to pay for
invoices grow. Several factoring companies give you access
services or goods, effectively giving them the opportunity to
to cash needed in as little as 24-hours.
take on more clients and grow.
1-800-422-0766 | InterstateCapital.com
Who needs factoring?
Factoring is open to any and all businesses, big or
small. It provides the ideal solution for companies that
are experiencing a tight cash flow, have slow-paying
customers, who don’t yet have a credit rating, or for those
who don’t have many assets to use as collateral.
Why should you consider factoring?
Factoring essentially provides a stepping stone toward
more traditional forms of finance, such as bank loans.
It’s a short-term solution to help businesses boost their
cash flow. Consider factoring if you need to free up your
cash flow to use that capital elsewhere, if you are a small
businesses with few assets, or if you are a start-up with no
credit history.
When should you use a factoring company?
Companies constantly face peaks and troughs, but there
are a few definite “signs” that indicate it’s time to begin
using a factoring company: if your customers take a long
Who uses
factoring?
Factoring is accessible to companies ranging
from small business start-ups to large
corporations in a variety of industries. The
following industries commonly use factoring
companies to manage their cash flow:
•Agriculture
•Construction
•Distribution
•
Food & Beverage
time to pay and you are struggling to manage your cash
•Government
flow in the interim; if you don’t have the manpower to do
•Healthcare
the back-office work associated with collecting on invoices;
•
if you have seasonal cash restrictions; and if you are a new
company with few assets.
Information technology
•Manufacturing
•
Oil & Gas
•
Service providers
•
Small business
company that specializes in your industry, that way they
•
Staffing agencies
will know first-hand what tools are required to factor your
•
Transportation & Trucking
How do you choose a factoring company?
When choosing a factoring company, you need to first
pinpoint your business’ unique needs. Find a factoring
invoices successfully. Choose experienced factoring
companies that have a high customer-service rating and
competitive discount and advance rates.
The benefits of invoice factoring
Factoring vs. a bank loan
Invoice factoring benefits companies that have outstanding
The main difference between using a factoring company and a
invoices and require the capital for other areas in the
bank loan is the flexibility factoring companies offer. Factoring
business that could increase profitability. For example,
fees can be slightly higher than a bank loan; however, factoring
companies that use invoice factoring can then redirect the
offers much more flexibility as there are no restrictions on the
cash flow toward payroll, buying new equipment, restocking
amount you can access – as your invoices increase, so does
supplies, hiring more employees, etc. and generally expand
the advance available to you. Similarly, you are not charged
and develop at a much quicker rate.
interest, you do not need to have a strong credit rating or
extensive assets, and you don’t go into debt.
Is factoring an option for small businesses?
Small businesses are often not able to wait 30, 60 or even 90
days and a factoring company provides the perfect solution
actoring types: Recourse vs.
F
non-recourse factoring
to this problem. Ordinarily, small business owners would
Most factoring companies offer both recourse and non-
seek a loan from a bank to bridge the cash gap; however,
recourse factoring options. In a recourse agreement, the client
bank loans are primarily for clients with a strong credit history
takes responsibility if the invoice does not get paid and buys
and assets. They also get you into debilitating debt. Factoring
the invoice back. In a non-recourse agreement, the factoring
companies provides small businesses with interest-free
company covers the cost if the client does not pay. For obvious
access to cash -- and no debt.
reasons, the latter option is more costly.
Become more profitable
by increasing
your
cash flow.
Factoring agreement
Are factoring companies regulated?
A factoring agreement is the document you sign, together
Factoring companies are largely unregulated; however,
with your factoring company, outlining the expectations
associations such as the Commercial Finance Association and
and requirements of the transaction. The details will vary
the International Factoring Association “self-regulate” factoring
from company to company, but all basic agreements
companies and monitor and maintain high ethical standards
should state who is responsible for what, the fees involved
within the industry.
and the processes to follow.
Factoring rates
How do you find the right factoring company?
The costs associated with factoring are dependent on the
When searching for the right company to meet your
discount and advance rates, and the length of the factoring
factoring needs, look for a company that specializes in your
period. The discount rate is what companies are charged
industry, provides friendly and personalized service, and
to borrow the money, ranging from 0.49% to 5%, based on
has a long track record of success for its factoring clients.
the original amount of the invoice; Interstate Capital offers
The key is to find the factoring company that can help your
competitive factoring rates as low as 0.49%. Advance rates
business grow.
vary, depending on the type of industry involved and the value
of the transaction, and range from 70 – 100%.
Industry leader, Interstate Capital, has collated the above list of the most important
questions to ask before you sign into a factoring agreement. For professional advice and
personalized factoring service, get a complimentary factoring assessment today.
Sarah Williams | InterstateCapital.com | 1-800-422-0766