Factoring

There are many ways to keep the cash flowing when handling your business and dealing with the business world. One of the methods utilized to maintain cash flow, a method that are growing quickly in popularity, is that of factoring. Factoring is the practice of selling your accounts receivable at a discount to another company. You get the money from the company that you sold your accounts receivable to and they become responsible for collecting the money.

The reason this move is often made is to ensure the continuous flow of cash in a business. When you turn over this responsibility to a professional company, you are freed up to concentrate on making more profit. Essentially, the practice of factoring is based on the “one in the hand is worth two in the bush” idea, and companies who use factoring are putting an emphasis on having most of the money now rather than all of it later. It can take time to collect on an invoice, so when a company factors its accounts receivables, they are getting their money faster and without the hassle of collection.

Especially with small businesses, it is important to have working capital, which is what factoring gives them. The money, then, can be invested, used to pay bills, and used toward payroll. The alternative is, of course, to chase the client or customer for the invoice payment and defer everything else while the money is tied up with the customer.

In order to fully understand factoring, you should be familiar with the practice: which companies do it, and a number of other important ideas behind it. So, consider the following ideas so that you can obtain a deeper understanding of factoring. Who knows, it may even be best for your business. Many businesses have found out that factoring has improved their bottom line, and have stayed with this process for many years.

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Obviously, factoring is not free. The company that is factoring their accounts receivable should expect to be charged a fee since this is essentially a loan against an unpaid balance and logical, the company that handles the factoring is in business to make money. The key is to make sure that the factoring is cost effective, and sometimes that means considering all of the factors and then periodically checking to make sure that your company is benefiting from it. The idea is to have money in hand rather than chasing the full amount. So how much can a business expect to give up when factoring? Knowing what to expect can help to make factoring more understandable and can help the business owner determine if factoring is an appropriate avenue to pursue.

Obviously, a business will not receive full value of the invoices they are factoring. As well, the sum that is paid to the factoring company is often a negotiated price that is based on a number of factors. Usually the number comes in at around 65% to 90% of the receivable debt. That means if a company is owed $1,000, a factoring company will pay them between $650 and $900 to take the account off of the hands of the company.

Some factoring fees are flexible depending on the account being sold. For instance, a company may get a more favorable factoring deal for debts over $100,000 than for those under $10,000. Perhaps the company gets 90% on the former and only 70% on the latter. As a final point, it is important that the amounts and any changes are negotiated before such things come up, and the business owner should carefully read all agreements made with the factoring company.

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When it comes time to negotiate that rate, it is important to know what influences the rate in the first place. Like with any other service, there are considerations that will affect what a company is willing to offer you. These considerations should be taken into account by you as you enter negotiations; if you want to be successful, you will need to keep an eye out for your own interests.

For one, the financial stability of your customers is a factor. What does that mean? It is a way of saying that a factor is willing to take a smaller percentage if they know your customers can afford to pay their bills. If your customers have poor credit and bad reputation for paying, then you can expect to pay for that extra risk.

Secondly, how much you commit to per month will influence the rates you receive when it comes to factoring. The more you promise to the factor, the less they will be willing to take. Like you, they are willing to take more “in hand” as opposed to “in the bush.”

Your contract is also a consideration. The length of the contract you sign with your factor will be a consideration when it comes to rates. The longer you are willing to commit to a company, the more likely they are to commit more to you over the length of that contract.

As you can see, many factors influence your factoring rates. When you sit down for negotiations, make sure you know where you stand. By knowing what you are doing for the factor, then you can make more reasonable demands on what they should do for you. Don’t be afraid to spell out exactly what you need, so that the factor has exactly the information needed in order to bring what is needed to the negotiations.

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Once a business decides to use factoring as a way to improve cash flow, there are a few steps that must be taken. First, one must give due consideration to the agreement. The factoring agreement is what defines the relationship between the factoring company and the one selling purchases: primarily the business owner. Here is a little bit about what you might expect to see in a basic factoring agreement.

The factoring agreement usually states that the factoring company will only take on accounts receivable that are acceptable to them. What does that mean? It means that the customers a business has with bad payment history may not be customer debt that the factoring company wants. On the other hand, debts from customers with great payment history will be highly favorable to the factoring company. Consequently, the factoring company maintains the right to choose what debts they are willing to factor; this is standard of the majority of factoring agreements.

Secondly, most factoring agreements say that the sale of accounts is on, what is called, a non-recourse basis. This is a favorable piece to the agreement if you are the company that is selling the accounts receivable. What it essentially says is that any losses from an uncollected account are taken on by the factoring company. However, since the factoring company gets to decide what accounts they take, it behooves the company factoring receivables to make sure that the accounts they take on are from reputable customers who will pay., otherwise a future relationship may be lost.

Part of the reason that factoring costs what it does is because these companies do take on a great deal of risk. By having to absorb unpaid receivables, they are taking on a serious financial risk. That is why the high fees and percentages are paid by the business owner and why some factoring companies even insist on a flat rate fee for each account taken.

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If you are a small business or even mid-sized business owner who has decided to use factoring as a way to keep cash flow going through your company, you need to find a factoring company. One of the factors to consider is where the specialty of each company lies. Though most will advertise a willingness to do large and small monthly amounts, the truth is that most consider a certain zone to be their specialty. Don’t use just the negotiations about the factoring as a deciding factor, research each company that you are considering and get references also. This is important since factoring small accounts versus large ones is very different.

Going in, then, the first thing you need to do is determine how much you are willing to or can factor per week with a factoring company. Most of these companies, no matter where their specialty lies, will insist on a monthly minimum. This allows them to more accurately allocate resources to your accounts and to more easily manage their own finances. You should assume this is something you will have to do.

So, when it comes time to select a factoring company for you to use, there are a couple of things you should consider. First of all, you need to know how much you can commit to each month in terms of accounts to be factored. Secondly, you should make sure you are looking at factoring services that fit your level of business. Find one that is comfortable at the monetary level you have set for yourself each month. Once you do that you are ready to go.


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Factoring companies, like any other service company, offer service on a number of levels. Often times, you get what you pay for in terms of service. So, you should consider what is important to you and your company before you select a factoring company. You will need to do some considerable research to find the right factoring company to work with.

There are many companies out there who will charge you a lower rate, but offer little in the way of service. You will likely rarely hear from them unless there is a problem, and getting questions answered or making any kind of contact is usually difficult. The rate is the lowest you will find in most cases though. Be sure that you don’t compromise the quality of service you receive just to get a lower rate. You will find that the risk is far from worth it.

On the other hand, there are the companies that are little more expensive. Often a little smaller, these companies will give you the plenty of attention and assistance along the way as you get into factoring. They are easier to get in touch with and more willing to give you a hand personally.

Often times, the temptation is to take the lower rate. After all, that is money you are saving. However, many businesses get into a relationship with a lower rate factoring company and end up getting burned. They regret the decision and are locked into a year or longer contract. Sometimes, it is just better to pay a little more for better service.

As a final point, one should note that the act of selecting a factoring company is not easy. However, there is no reason to make the experience worse by ending up with poor service. In the end, consider the level of service you would like, what level you need, and whether or not it is worth a few extra dollars a month to get just that. You need to weigh your options carefully, and look at all sides of the equation when you are deciding on what factoring company would be best for your business.

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There are consultants for everything. You can hire efficiency consultants, banking consultants, and even consultants for décor. Did you know, though, that you can even hire someone to consult on your factoring? Also known as factoring brokers, these consultants will help you to determine if factoring is the best thing for you as well as which company is best to serve as your factor.

Hiring a factoring broker is certainly a viable option. Aside from helping you hire a factor, they will usually help you set yourself up as a company to factor as efficiently and profitably as possible. They will help you with how to maximize your chances of getting funding under the best possible terms. In other words, they will help you negotiate your factoring terms.

Additionally, since selecting a factoring company is so difficult, they can do that as well. Your broker will find the factor that best fits your company and then, as mentioned before, they will help you get the best possible terms from that company. This saves you both time and money.

The best part of all is that most brokers will cost you nothing. That is because the factoring companies will pay them finder’s fees for bringing in customers. You can save money and time and in the end pay nothing for the service. A factoring broker, then, may just be the best way to go about starting your factoring.

To find a broker, there are a couple of ways you can go. You can check your local yellow pages where they often will list. The online yellow pages can help you extend your search to other regions. As well, you can call around to banks and financial institutions and ask; they will often know who the brokers in your area are.

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So, you have decided that factoring is for you. You have figured out everything you need and have found the right institution to do your factoring for you. Additionally, you have gotten all the preliminaries worked out. Next, then, you need to apply. The application process is not difficult if you go in knowing what to expect.

First, the application is going to be influenced by the type of factor you are using. If you are using an online bank or financier, you very well may need to fill out an online application. Make sure the site is secure and that you have looked it over well. Eventually you should expect to get something in hard copy to go with it. When you do, review the information with the utmost attention to detail.

If you are working in person with a company, like a local bank or financial institution, then you will likely fill out an application in person. There, it works similarly to any other financial agreement. You will fill out information about yourself, your company, and the terms of your factoring agreement.

No matter which type of application you fill out for your factor, you will be giving out the same basic information. For both, you can expect to have to disclose credit and debt information both personally and from your company. That is what tells the factor whether or not your receivables are worth taking on.

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The application process for factoring is somewhat long and it may seem like a hassle: consider the benefits you will derive from factoring and then prepare yourself for the process. You can expect to have to fill out three parts to the application. You will have a personal section, a business section and a customer section: all which require a considerable amount of detail. All of the information will be used to determine whether or not you are a customer they want to work with as well as what type of rates you may get.

The first part of your application will likely be about your business since that is who they are technically working with. You will need the company name, the DBA, and the physical address of your company. Additionally, you will need to provide contact information and all other contacting resources like email and website addresses. Finally, have your tax ID ready as well as whether your company is an LLC, partnership, or even a corporation.

The second part of your application will likely be information about you, personally. The basics like all of your contact information are obvious needs at this point. For a credit check, though, you will likely have to give up your social security number, unless your business is a separate entity, a corporation, which is deemed by law as “an individual” and can therefore establish its own credit rating separate from the business owner.

Finally, you will need customer information. Since the factor would like to evaluate your customers, this is important. You will need to, in most cases, just give information about one or two of your biggest clients. They may want to know your current accounts receivable total. This information in totality will give the factor a clear picture of what your company is and how it functions.

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