Category: Define Factoring

What’s Not Covered in a Typical Non-Recourse Factoring?

In factoring, you get an advance on the value of an invoice so you won’t have to wait 30 days or more to get the money you can use as capital for your business. Small business factoring companies may advance you as much as 75 to 85 percent of the value specified in your accounts receivable. If your customer doesn’t pay, then eventually you’ll have to give back that advance. But in non-recourse factoring, you don’t have to.

Of course, it depends on the reason why your customer doesn’t pay. The typical non-recourse factoring may only cover non-payment due to bankruptcy. And that may even have a time frame involved—if bankruptcy occurs after 90 days from when the factoring company buys the invoice then it may not be covered by the factoring agreement at all.

Obviously, there are many other possible reasons why a customer won’t pay up:

  • You breached the contract. Usually, you have an agreement with your customer about what you’re supposed to provide. Perhaps you were contracted to provide 100 doodads at a specific date. But maybe you only delivered 90 doodads, or perhaps you provided the service or products a few days later than what was specified in your agreement.

Now the person you dealt with may have grudgingly accepted your products, but afterwards someone higher up in the company hierarchy may have decided not to pay you at all because you breached the contract.

  • Your customer doesn’t think that you provided the quality of service they expected. This situation is a bit more problematic. When quality is at the heart of the issue, it can be very difficult to quantify, which is why you really need to have a clear and concise contract with your customers so they cannot claim this sort of thing.

This usually happens when you provide a service. For example, if you provide janitorial services a customer may be unhappy with how dirty their office remains even after your janitors did their work. The customer may be so unhappy that not only will they stop hiring you, but they may also refuse to pay for the work your janitors renderred.

  • Your customer may simply have decided to breach their agreement with you and refuse to pay. These things do happen. You just have to deal with non-paying customers the best you can. You may start with a non-threatening letter, and then when that doesn’t work you will need to be firmer in your tone.

You may end up having to threaten them with the option of bringing in a collector. That may seriously damage your relationship with your customer, although you may argue that they started the damage by refusing to pay.

And if you bring in a collector or a debt buyer, you should be prepared for collecting less than what was owed to you. Collectors may ask up to 40% of what they collect, and they may collect less than the amount owed. Debt buyers take over your account completely, but they may only pay a small fraction of the amount owed.

If any of these situations occur, the typical result even with a non-recourse factoring agreement is that you’d need to return the money you got as an advance.

The Ins and Outs of Purchase Order Factoring

Some asset based lending companies have a wider definition of what kind of assets can be used as collateral. Most lending companies consider the small business owner’s home as a viable collateral, while others may also accept expensive equipment as security. Some even offer financing based on a company’s purchase orders and accounts receivable, and that’s where purchase order factoring comes in.

Using the Purchase Order

The entire process starts with a purchase order from a customer. Your business may not have enough working capital to fulfill the order which will force you to turn down the opportunity. But you don’t have to do that because some asset based lending companies can help.

What they can do is provide you with extra capital based on the value of the purchase order. You need to demonstrate that the purchase order offers a wide margin of profit, so that the lending company can take its share without hurting your business. You also have to prove that you have the means to fulfill the terms of the purchase order.

Usually, you’ll be provided with a line of credit so that you can pay your suppliers in order to fulfill the purchase order. Your progress towards completing the project will be monitored closely.

Factoring

Once you have succeeded in fulfilling the order, the next step comes in. Usually, your customer is another business, and you allow it to pay you in full in 30 or even 60 days. Since you’re obviously in need of working capital immediately, that wait may not be good for your business. So again the lender steps in and helps.

They advance you the money based on the value of the payment coming to you. You get an advance that may be worth about 70 to 80 percent of the value of the contract. You can then use that money to cover essential expenses, or even to fulfill other purchase orders so you won’t need the help of the lending company again.

When your client pays in full within the agreed upon time period, you can then get the rest of the money. This is after the lending company gets the money they advanced to you.

Benefits

The benefit of this entire process is twofold. First, you get the money to fulfill your purchase order. Without it, you don’t get to benefit from the business opportunity. You may also tarnish your reputation because you don’t have the capability to fulfill orders.

The other benefit is that you get your payment in advance. This allows you to take advantage of other business opportunities that will come your way. You don’t have to wait to get your own money anymore, and you can use it to make your operations more efficient.

With purchase order factoring, you get your profits, your lender gets their fees, and your customer gets their order. Everybody wins.

Finance for a Business: Line of Credit vs. Factoring

Quite a few people think that when someone needs finance for a business, he should get a bank loan. The business owner gets a lump sum of money, and then after a specified period of time they repay the amount with interest. But today, there are already quite a few options for business to business finance.

A business, for example, may have a line of credit available for them. Or perhaps they can also enter a factoring deal with asset based lending companies. So which one is better for a small business?

What is a Line of Credit?

When a business has a line of credit, then the owner may take out an amount of money depending on how much they need at any given moment. The line of credit has a maximum amount, and they can’t borrow money more than the limit. When they repay the money they borrow, they then increase their credit line.

Using a credit card is very much like a using a line of credit. If you have a maximum limit of $10,000 on a credit card, then you can only borrow up to that amount before you start paying off what you owe. Meanwhile, you also have to pay interest.

What is Factoring?

Factoring is a type of financing without technically getting a loan. Instead, you give your accounts receivable to a factoring company, and in return you get an advance on the value of the money instead of waiting for it. So if an invoice is worth $10,000 and the factor agrees to advance 80%, you get your $8,000 right away instead of waiting for 30 or 60 days. When your customer pays up in full at last, the remainder of the money is passed on to you, once the factor has taken off its fees.

Which Is Better?

If you can get a line of credit, it may seem like this is the better option. But the operative word here is “if”. Getting a line of credit from a lender or a bank is not as easy compared to dealing with a factoring company.

First of all, the factoring company doesn’t really care about your credit rating. They mostly care only about the credit rating of your customers. If your customers have stellar credit, then factoring approval is almost automatic.

Using a credit card or a line of credit may also pose risks for your company, because you can’t really be sure that you’ll be able to pay back the loan with the interest on time. That’s not really so much of a risk with factoring, because you’ve already made the sale with your customer. You already have the money to pay the advance, except that you need to wait until the due date of the invoice.

When it comes to finance for a business, you may find that factoring offers the least amount of risk for your business. When you have excellent customers, you have little risk of getting your application for financing rejected, and you have little risk that your factor won’t get back the money they advanced to you.

Factor Receivables and Other Ways to Grow Your Business

Growing a business can be very challenging. In today’s environment, business can be slow and customers often demand credit. Your customers may need 30 days or maybe even 60 days to pay up in full. But herein lies the problem: you need the money now. Fortunately for you, you can opt to factor receivables so you can get a large chunk of the payment in advance.

But you can’t simply rely on factoring companies to help you. Even the best factoring companies can only do so much. They can give you more time to focus on growing your business by taking care of your accounts receivable and your collection, but you still need to elevate your company above the rest of your competition.

So aside from factoring, here are some ways which may help your business thrive:

  • Innovate. One way to be stand out from your competitors is to actually be different. Be innovative and do things differently. Offer new products and services, or at least new variations of popular goods and services. You can’t just do what other businesses are doing. If you own a janitorial service, for example, you may offer cleanings services that your competitors don’t offer.
  • Focus your efforts in one specific area. Take a good long look at the state of your company, and then identify which area really needs improvement. By focusing your energy on this area, you give yourself a better chance of improving it than if you try to improve everything at once. That kind of scattered approach may lead to lots of plans that don’t come to fruition because you weren’t able to concentrate on them properly.
  • Minimize and eliminate unnecessary expenses. Your business may be in trouble because your expenditures are getting out of control. You can reduce these costs by first tracking your expenses accurately. Then identify which expenses aren’t absolutely necessary so that you can put your money to better use.

You can track how much you’re spending on research, payroll, equipment, supplies, and advertising, and see whether each area needs an increase or reduction in budget.

  • Improve your online advertising. With so many people looking up information through Google and social media, it only makes sense that you establish your brand’s presence online. First you need a website, which you can use as an advertising platform. Here you can include all the information about the products and services you offer.

Then you can also engage in social media. You should use blogs, articles, videos, and email to reach your potential customers. By engaging you’re your customers, you will likely get more sales which in turn will help your business grow.

There’s no doubt that you can help your business grow when you factor receivables. But that’s just part of a bigger strategy. You need to be different, you need to be focused, and you have to improve your online marketing methods too.

Why Small Business Factoring May Be Better Than Bank Loans

For a long time, the rule of thumb was – if your business needs more funding, you go to a bank for a loan. But nowadays if you need a quick infusion of cash, small business factoring may be a more ideal solution for you than applying for a working capital business loan from a bank.

Many small businesses have discovered that factoring suits them better than a bank loan. Here are some ways in which bank loans may not be as good as factoring:

  • Your business may not qualify for a bank loan. Perhaps your company doesn’t have much of a history yet, or perhaps the bank simply thinks your business represents too much of a risk for them. When you actually don’t have the option of getting a bank loan, factoring obviously becomes a much more attractive proposition.

With factoring, getting your funding is much easier. In fact, factoring is not really a loan at all. You get the money from your accounts receivable in advance, so what really concerns your factor is the ability of your customers to pay you what they owe you and on time. If you have reputable customers, you’re very likely to get approved for factoring.

  • Bank loans take a very long time to process. Even if you do get the money you need from the bank (which is obviously not a sure thing), the loan application process is still interminably slow. The bank has to investigate the state of your finances so that they can be absolutely sure that you have the capacity to pay them back. This lengthy process can be very frustrating, especially when you need money right away to meet payroll.

But with factoring, the application process is much shorter. After all, your credit rating doesn’t really matter all that much to them—only the credit rating of your customers. So setting up the factoring line takes only a few days, instead of months and you can have access to money which you can then use for truly time sensitive financial issues, such meeting payroll, buying equipment, and covering rent and utilities.

  • You have to worry about how to pay back the loan. This is a natural concern. You have borrowed a huge sum of money, and you have to pay it back along with interest. You will probably wonder if you’ll be able to pay it all back, which can be especially worrisome when you put up your own home as collateral.

But factoring isn’t a loan. So you don’t have to worry about repaying the money. Your main concern is that your customer pays what they owe you and for the most part that’s not really a concern at all. Keep in mind that the factor will investigate the creditworthiness of your customers. If they are not deemed credit worthy then the invoice will not be accepted.

There’s a whole lot less worrying when you engage in small business factoring. You can rest easy knowing that you’ll get the capital you need right away.

Key Aspects That Determine Factoring Business Fees

Just as the banking industry charges interest for their loans, there is no reason for any factoring business not to do the same. After all, how else can they make a profit? Factoring companies will provide you with the cash you need to meet payroll or pay equipment fees, but they also expect to be compensated for their services. They’re not in it just out of the goodness of their hearts.

So how do AR factoring companies determine how much they will charge you? Each company has its own ways of charging you, but in general the fees will depend on the following factors:

  1. Value of account receivables. While the more invoices you involve in the factoring process will help lower the cost of the factoring, the most important is the value of each invoice. Having just ten invoices factored will cost you less if each one is worth $100,000. Having a thousand invoices worth a thousand each will cost you a lot more. That’s because the factor invests time and manpower for each invoice given to them so dealing with one large invoice is a lot more cost-efficient for them than working on a hundred small invoices.

Of course, the most ideal scenario is if you have lots of accounts receivables and each one is worth a lot of money.

  1. The state of the industry. From the point of view of a factoring company, not all industries offer the same level of risk. Some industries are notoriously difficult for a small business to survive. The restaurant business is a good example. Medical clinics, clothing stores, and construction firms are also considered high risk. With these industries, factors usually charge a higher rate, and the advance they offer on the value of the invoices are usually lower than average.
  2. Types of customers. The factoring company will also take note of the kind of clients and customers you have. The factoring company prefers to deal with companies who engage in B2B (business to business) transactions rather than B2C (business to customer). Businesses are more streamlined in their payments, and they usually have enough funds to pay what they owe.

On the other hand, individuals are more erratic. Also, they tend to deal with lower volumes and values, which as what we’ve already mentioned, are not agreeable with factoring companies.

  1. Customer credit. Factors take a very close look at the credit history of your clients. They check to see if they pay their debts in full and on time. They also check on the stability of these customers, because obviously, if they’re on the brink of bankruptcy they won’t be very attractive to factoring companies.

Here your best bet is to have customers with an established credit history, and who have a stellar reputation when it comes to paying their debts. With a roster of such reputable companies, factors will probably be inclined to charge you less in interest and fees. That’s because there’s a low probability that the factor won’t be able to recoup the money they advanced to you.

Find Out Why the Demand for Business Loans USA Has Gone Down

Federal Reserve Chair Janet Yellen last month revealed to Congress that the demand for small business loans in the USA has not been very high and she said this phenomenon may be attributed to the financial crisis and the fact that home values have dropped significantly.

Such comments have stirred the world of small business where optimism is pretty high. Many small business owners are projecting better financial outlook in the near future in spite a 12% decrease in loan demand

But perhaps we are looking at it from the wrong perspective. The demand for business loans from traditional lenders has dropped and it may not have anything to do with the financial crisis at all. It could be because business owners nowadays have the option to seek capital online.

Solving the Small Business Capital Crisis

The country’s economy is on the rebound and job creation rate has reached an all time high in nearly 20 years. But although the decreased appetite for risk is evident across financial institutions in the US, startups now have another alternative: online lenders.

These lenders give out loans anywhere from $5,000 to $1,000,000 or even more. Some of these lenders require daily payouts, while there are those that agree to bi-monthly and monthly payments. Loan terms are usually anywhere from 3 months to 3 years.

Business Loans USA vs. Online Financing

For startup businesses, online lenders are especially more attractive than traditional lenders because they offer something that bank loans can’t. These include:

  1. Fast approval

Bank loan applications take an average of 2 weeks to get approved (or rejected) and it will take another 15-60 days before they will release the loan. Online loans, on the other hand, can approve (or reject) an application within a day and release your finds within 48 hours. Any business person worth his salt would see this as a great benefit. After all, time is money.

  1. Less stringent requirements

 

While banks and other financial institutions that offer business loans will have a long list of requirements that you need to comply, online lenders only require you to fill out an application form and send your bank statements to them via email or as an attachment to your application.

  1. Better loan terms

 

There’s no denying the fact that online creditors levy higher interest rates compared to traditional lenders. However, online platforms have lower overhead, fewer middlemen and lower expenses operate so they are able to pass significant savings to the borrowers. They can afford to offer better loan terms than banks.

 

Many small business owners are now turning to online lenders which collectively, has become a $3.2 trillion industry in the US alone. Sure, banks are still the ideal option for large companies looking for capital financing but for small businesses and startups, alternative lending is clearly the more practical option.

 

Alternative lending is also not just limited to business loans. There are other types of online platforms that also specialize in factoring, which is not technically a loan but a cash advance.

 

How Medical Receivable Factoring Works

If you’re running a business in the health care industry, it’s guaranteed that sooner or later you’re going to have a problem with cash flow. And that’s where medical receivable factoring comes in.

There are two reasons for this. One reason is that you’re going to have to spend a lot of money on day to day expenses. Whether you’re a vendor selling goods or services to clinics or you run a clinic that helps treat patients, expenses are a fact of life in the medical industry. A clinic, for example, will need sufficient ready cash to cover payroll, pay for rent and utilities, make the regular payments for the equipment, and purchase regular medical supplies such as gloves, syringes, bandages, and medicines.

Another reason is that health insurance companies can really slow down your cash flow cycle. While your suppliers may require you to pay up front or in 30 days, insurance companies can take up to 120 days to settle the bill. What’s really aggravating is that you’d have to follow up on them regularly, and even then they may not pay the full amount.

So how does medical receivable factoring work?

  1. Factoring for vendors. In this scenario, your customers are the clinics who treat patients. When you bill them, you send the receivables to the factoring company which then gives you the advance of about 80% of the value of the invoice. The factor then waits for the clinic to pay them in full, and then the rest of the payment is sent to you minus the fees of the factor. It’s pretty much a straightforward arrangement.
  2. Factoring insurance claims for clinics. This version can get a bit more complicated. It’s the same basic format, in which the factor forwards you an advance and then the rest of the payment is sent to you once the insurance company has settle the claims. Usually the factor deals with the insurance companies by sending a notice of assignment, and experienced factors realize just how long it will take so that they don’t charge you outrageous amounts when they take 120 days to pay.

However, insurance companies are also known not to pay the full amount. So if this happens, the factor doesn’t reimburse you for the missing amount. In fact, the factor may hold back 20% of the receivables in a reserve account to cover instances when the factor pays less than the advance you get. So if you get 80% in advance and the factor ends up getting only 70% of the value of the receivable from the insurance company, the factor takes money from the reserve account to cover the advance and the fees charged by the factor.

  1. Factoring Medicaid and Medicare claims. As you know by now, factors operate by requiring your customers to pay them directly instead of sending the payment to you. Unfortunately, Medicare and Medicaid don’t allow you to assign the claims to a third party such as a factor. Medicare and Medicaid will only pay you directly, and won’t send payment to your factor.

This problem must be discussed with your factor, but an experienced factor already knows how to set a managed account, which is also known as a sweep account. This account is in your name and ownership, so Medicare and Medicaid can send the payments to this account. At the same time, the account gives full operational control to the factor, so the factor can collect the payments and its fees and also settle the invoice for you.

All these may seem complicated, but when you’re dealing with a financing company that has experience in medical receivable factoring, it’s actually very simple.