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Buyers Guide to Factoring

1. Introduction
2. 15 Factoring Terms You Should Know
3. Account Receivable Factoring: The Pros and Cons
4. Is a Factoring Service Right For Your Company?
5. The Different Types of Factoring
6. What to Look For In A Factoring Service
7. Looking at Factoring Costs, Discounted Rates and Fees
8. Contracts and Agreements For Factoring Services
9. 6 Tips for Every Business Needs To Know

Businesses need money in order to operate effectively; this has always been the case and will
continue to be the case in the future. Sometimes businesses need short-term or even
continual funding solutions that provide quick access to cash – your business is no different.

Maybe you need some quick cash to meet payroll, purchase inventory or a quick boost to your
company’s working capital so that you have extra money on hand. Regardless, businesses
have a number of funding solutions available to them today - business lines of credit and small
business loans being only two of the many.

One of these solutions is business factoring and is an underused yet highly advantageous
method of receiving financing for your business.

What is business factoring?
Business factoring, also called “invoice factoring”, allows you to take your business’ unpaid
invoices and receive cash for them from a factoring company or a “factor”. Factors take your
accounts receivable, review them, and upon approval, advance you a certain percentage of
the overall value of your submitted invoices.

Essentially, invoice factoring services provide a fast-funding option for large and small
businesses who meet certain criteria. Much unlike business loans and lines of credit, your
personal and business’ credit history do not come into play, rather qualifying for business
factoring relies on your monthly invoices and the credit worthiness of those to whom you
extend a limited line of credit through invoicing.

How factoring works - the process
The factoring process is simple and straightforward, at least on your end. You begin by
compiling and making copies of the outstanding invoices that you want funded, though you
should double check to be sure that all required information and signatures are in place before
handing your invoices over to the business factoring service to avoid future delays.

15 Factoring Terms You Should Know

Once the factor has possession of your invoices, they will perform certain checks on your
clients to verify their payment history and their credit worthiness. Factoring companies use this
information to determine whether they can accept your invoices, how much money you are
eligible to receive up front, and even the discount rate that they will charge you for their
factoring services.

After the factoring company checks out your clients, they look over each of the original
invoices to check for errors, discrepancies, and missing information. Once the factor validates
the invoices, they send out a notice of assignment to your clients, which this document informs
your clients that their outstanding balances should be paid directly to the factor instead of to
your business.

Getting your advance from the factor usually happens within two to five days following the
validation of your clients’ invoices, though if a factoring company allows online invoicing, you
may be able to receive your funding in as little as twenty-four hours. Generally, factors deposit
funds directly into your business’ bank account, though some still rely on cutting paper checks
to distribute advances to businesses.

When a factor sends you your initial payment, it is usually 70% to 90% of the value of your
accounts receivable. Once the factoring company has collected from all of your clients, you
will receive the remainder of your advance minus the factoring service’s fee, which generally
runs from 3% to 5%, depending on a few different factors.

Term Definition
Account a collection of claims or invoices against a
particular customer for goods or services delivered
Accounts Receivable the money that is owed to a company for goods
and services it has provided to customers on
credit. The accounts receivable amount is an
asset to the company. Accounts receivable in the
books of company goes as accounts payable in
the books of customers
Advance the percentage of an invoice's face value which a
factor pays upon its purchase
Cash flow the measurement of cash a company gained or
lost during an accounting period and adjusted for
any previous accounting for accruals and other
non-cash transactions. Since money does not flow
in and out at an equal rate, in most businesses, an
analysis of cash flow is important as well a debt
management program may be needed, especially
of businesses that are cyclical in nature, or subject
to external forces

Collateral an asset that is promised or given to a creditor (a
factor or a financial institution) to guarantee the
discharge of an obligation by the debtor. Upon
default, the creditor may seize the asset and sell it
to pay off the loan
Discount Fee the amount earned by a factor on each invoice
purchased. Discount fee is based on the period of
time the invoice remains outstanding (unpaid) and
is set forth and agreed upon by both parties in the
Discount Schedule
Discount Rate the percentage of the face value of an invoice that
an invoice factoring company holds as its fee
Face Amount or Face Value the total amount of an invoice. Face value is the
amount that has to be paid to the factor by client's
customer, without consideration as to how much
was advanced to the client
Factoring the process of purchasing of debts owed, or
accounts receivable in exchange for immediate
payment at a discount
Invoice a legal debt instrument which indicates the
amount due from a customer to pay for delivered
goods or services. Invoices may be traded or sold
Invoice Discounting instant cash upon issuing invoices without sales
ledger and collection services required
Liability a financial obligation, debt, claim or potential loss.
Usually debt on terms of less than five years is
called short-term liabilities and debt for longer than
five years in long-term liabilities
Non-Notification an aspect of confidential factoring where the
customers are not notified of the client's
arrangement with the factor
Non-Recourse a type of factoring where the factor assumes
complete responsibility for collection of debt. If the
debt is not collected due to the financial inability of
the customer, the factor assumes the loss
Notification a process whereby the factoring company lets an
account debtor know that an invoice has been
purchased from the client and that the debtor is to
pay the factor directly

Account Receivable Factoring: The Pros and Cons

Every business financing option has its own set of benefits and disadvantages; invoice
factoring is no different. Some of the more prominent benefits of utilizing a factoring service
include:

• Receivable factoring allows you to get money for your business right away, generally
within two to five days and sometimes within twenty-four hours if the factor offers online
invoicing.
• You can potentially qualify for more up-front funds through factoring than you would
receive through a small business loan.
• You alleviate yourself of extra work by outsourcing your accounts receivable collections
to somebody else.
• Industries that find it difficult to receive funding through traditional means may be able to
receive the advances they need accounts receivable loans.

Of course factoring is not a perfect solution in all situations and for all businesses. There are
some potential downsides to this business funding option:

• If you have slow-paying clients or some of your clients have less-than-stellar credit, this
can affect the discount rate that you pay to the factoring company.
• If your clients prove to be unreliable or do not meet a factor’s standards, you may
receive a lower percentage up front, or it may even cause you to be ineligible for
funding through this method.
• Factors are also not collection agencies so if a client fails to pay their outstanding
balance by a predetermined date, or they fail to pay altogether, this will likely increase
the amount of money that you owe a factor in addition to adding to your current
workload.

Is a Factoring Service Right For Your Company?

Business factoring services are available to any business that extends credit to, or invoices,
their clients for services rendered or products delivered. Product-based businesses such as
flower shops and nurseries, department and hardware stores, and service-based industries
such as “temp” agencies, landscaping companies and commercial trucking firms can benefit
immensely by using factoring services.

While certain industries such as the medical and construction fields require a specialized
factoring service, any business invoicing their clients is a potential candidate for factoring.

Small business factoring – financial limitations
Most factors prefer to work with companies that can supply a minimum of $5,000 to $10,000 in
accounts receivables for a 30-day period. However, there are factoring companies that work
with businesses that maintain less than $5,000 in accounts receivables on a monthly basis, but
usually at the cost of a higher discount rate.

Businesses in high-risk industries such as the textile or garment industries are typically not
desired candidates for traditional business. Business factoring allows these types of business
an option to receive the financing they need.

Regardless, any company that can benefit from quick access to their invoiced funds and are
able to meet the minimum monthly requirements of invoice factoring is a good candidate for
this type of short-term business funding.
It can be difficult to evaluate all options and make a sound decision when your business needs
cash immediately, but taking the time to choose the right business cash advance provider is
well worth it.

Many different companies offer cash advance and factoring loans. Some are large financial
services and lending institutions, others are small businesses that specialize in this type of
service. A company you already work with, such as your current credit card processor or bank
may offer the service you need. If your business is credible, you may be able to negotiate a
better rate because these institutions are familiar with your business history.

Evaluating several providers is a good way to determine if you are getting the best terms
available for your business.

Some important qualities to look for in a provider:

• Accessibility. You will need to communicate frequently during the application process
and possibly throughout the repayment process.
• Knowledge. The provider should be able to explain the application and repayment
process thoroughly and answer any questions you may have.
• Reputation. You should choose a merchant cash advance company with a solid and
established history in providing financial services to businesses similar to yours (similar
in size, revenue, amount of advance, etc.).

• Honesty. A good provider should be able to evaluate the financial state of your
business and make a recommendation as to which type of financing would be best for
you. No provider should try to steer you toward an advance amount that is too high, or
towards an agreement with onerous repayment terms.

If a provider tries to charge fees for different services beyond the factor rate or advance fee,
such as application or administration fees, be wary. Processing and administrative fees are
not generally assessed by reputable providers. No provider should require that you switch to
their company for all of your merchant services such as credit card processing. Remember,
always compare rates and price quotes from several providers to make sure you are getting
the best deal.

The Different Types of Factoring

There are two main types of business: recourse and non-recourse. The differences between
recourse and non-recourse factoring services are comparable to the differences between an
automobile with full coverage insurance and a vehicle with limited insurance coverage.

Recourse factoring is like having an automobile with limited insurance coverage – if you get
into an accident or damage somebody’s property – those charges will come out of your pocket.
The tradeoff is that these services are generally much cheaper than obtaining full-coverage
insurance. With recourse factoring, if one of your clients defaults on a payment, this money
comes out of your own pocket.

With non-recourse factoring, the factor, or insurance company in this analogy, assumes all the
risk. When you enter into a non-recourse factoring agreement, the factoring company
assumes all financial responsibility for unpaid invoices. While this is a nice advantage to have,
just as full-coverage auto insurance is more expensive than basic car insurance, you should
expect to pay a lot more money for non-recourse factoring services.

Types of billing
Depending on your industry and your business’ setup, you will generally invoice your clients in
one of two ways: with progressive billing or non-progressive billing.

Non-progressive billing is the act of invoicing your clients one time for one-time goods or
services. This method is less expensive when it comes to securing the services of a factoring
company. Companies that collect in installments or require ongoing payments for goods or
services use progressive billing. Because progressive billing generally requires more effort
and ongoing contact between your client and the factoring company, using a factoring service
for accounts that require ongoing payments will require higher fees than the aforementioned
group.

What to Look For In A Factoring Service

Choosing the right factor for your business’ accounts receivable financing needs is important
and the consequences of choosing a business factoring company that fails to meet your
needs, can negatively affect your company’s financial bottom line and even future business
transactions.

To make sure you are making the right decision, weigh out your options and shop around.
Here are some traits to consider in a factoring company provider.

Professionalism and personality
How well does the potential factoring company convey themselves as a business? The
factoring company you choose will be in direct contact with your clients so you want a positive
personality and constant professionalism.

At the end of the day, it is your company’s reputation on the line – you are using a factoring
company to help improve your cash flow situation temporarily, but you have to live with the
outcome of your choice for a long time into the future. If you choose a factor that is short with
your clients, is rude, pushy or any other flavor that describes unprofessionalism at its finest,
the long-term consequences can become devastating through loss of client revenue and even
negative word of mouth advertising.

Ask to review some of the notifications that a factoring company sends out to clients or even
ask to listen in on a phone call between the factor and a business’ clients if you feel the need
to. This point is too important to overlook; again, it is not just a month’s worth of revenue on the
line, it is your company’s name and reputation.

Longevity as a company
The length of time that a factor has been in business speaks volumes about their integrity, their
business, and their reputation. While new factoring companies can provide the same quality of
services that established factors can provide, length of time in business is indicative of a
company that offers sound services.

As with any type of business funding, it’s better to work with a company who has a history of
providing factoring loans in your field because they are more familiar with your needs and can
address your problems.

Customer support
Many reputable factors offer a wide-range of support services such as email, one-on-one
meetings, and telephone support. Quite honestly, because there are several factoring
companies to choose from, if a certain company only provides email support during business
hours, it may be a good idea to leave this potential candidate on the back burner to see if you
can find a factor that offers wider-reaching customer support services.

Experience in the factoring field
Some companies that supply business-funding options offer more than just accounts
receivable factoring services such as merchant cash advances, small business loans, and a
variety of other financing options to small and large business owners. While the “jack of all
trades” type of financing companies may perform with excellence as a small business factoring
company and may even offer a lower discount rate, oftentimes you will find that you receive
better services from companies that work strictly in the field of invoice factoring.

References
The most valuable insight that you can receive about a potential factoring company will come
through their references.

When calling a factoring company’s references, make sure you obtain key information such as:

• How long did it take the factor to approve your funding request?
• Was the application and approval process simple, or time-consuming and confusing?
• Did you need to ask questions during the process? If so, how would you rate the quality
of support that you received?
• How long did you have to wait to receive your initial funding?
• Did you receive any comments or complaints from your clients about the invoice
factoring company? If so, what were they?
• How quickly did the factor send out the remaining balance of your advance?
• Did you have any surprises during the process? Additional fees, delays with payment or
communication, etc.
• If you were to consider using factoring services in the future, would you use this
company again?

You can come up with your own questions if you want to, but by using the above, you should
be able to determine whether the factor you are considering will be a good choice for your
business’ funding.

Looking at Factoring Costs, Discounted Rates and Fees

Factors charge a fee in exchange for the advance and work involved in collecting on your
business’ outstanding invoices. This fee, also called a discount rate, can run from 1% to 5% of
your submitted accounts receivable’s value, but the fees generally range from 3% to 5% in the
majority of cases.

A number of different factors help a factoring company determine the discount rate offered.
Some factors that affect the fees and up-front percentages offered include:

Factor How It Will Help
Your industry Certain industries inherently carry more risk
than others do when it comes to collecting
monies owed. If you run a business in a
higher-risk industry, such as in the garment
and textile industries, chances are that your
factor will require a higher discount rate and
may limit the amount of funding that you are
eligible to receive up front
Your clients If you were working to acquire a small
business loan, your credit would be one of the
determining factors of your interest rate, or
discount rate in this case. Because factoring
loans rely on the ability of your clients to repay
and their credit worthiness, if you maintain
accounts with clients that have an established
repayment history and a good credit rating,
you will oftentimes receive a better discount
rate and have more room for negotiation with
your factor
Number of invoices Each invoice that you submit to a factor for an
advance increases their workload. By
submitting fewer high-dollar invoices over a
larger number of low-dollar invoices, you are
decreasing the amount of work for the factor,
thus opening up the possibility of negotiating a
better discount rate if your factor does not
offer it automatically
Type of billing Progressive factoring will require more work
for the factor, thus the discount rate will likely
be higher for ongoing invoices as opposed to
one-time, or non-progressive, invoicing

Type of factoring If you want the factor to assume all the risk for
unpaid accounts receivables, also known as
non-recourse factoring, you should expect to
pay more for this type of factoring service as
they increase the factor’s risk considerably

Account setup costs
Some factoring companies charge an account setup fee to businesses who wish to use their
services. These fees can range from $500 to over $2,000 and help cover the costs of a
factor’s time and efforts in running credit reports, validating your clients’ invoices and abilities
to pay what they owe. Not all factors require setup fees, but this one-time charge is common
in the industry.

Contracts and Agreements For Factoring Services

Because factoring companies put forth a substantial amount of effort and take on risk with
every customer they sign on, more times than not contracts are required for all factoring
transactions. Typical contracts are annual, semi-annual or even monthly. While these
agreements are commonplace in all such industries, before you sign on the dotted line you
should know and understand the necessary elements of a factoring contract.

1. Fees and payment terms – For obvious reasons, this is an important part of accounts
receivable financing. Be sure that the initial payment percentage, any setup fees, the
discount rate, and timelines for the final payment on your accounts receivables are
outlined within the agreement.
2. Collateral – While your invoices are technically considered collateral, in some cases a
factoring company may require additional security in the form of a lien against your
company’s assets to protect them in the event of non-payment from your clients.
3. Miscellaneous – Other common entries in a factoring agreement include clauses that
protect the factor. Usually repayment terms for fraud and non-payment by your clients
will require out-of-pocket reimbursement to the factor or giving up additional invoices to
satisfy the money that the factor is due.

A few other things to consider when you are looking over your business factoring agreement:

Be on the lookout for ambiguous language or previously undisclosed fees
Contracts outline the details and requirements of the factoring process in much more detail
than speaking with a factor does. If you see fees or terminology that you do not understand,
ask the factor about them.

Require minimum/maximum invoice count in writing
If a factor requires a pre-determined minimum or maximum number of invoices in order to
process your invoices, be sure that these numbers are included in the agreement before
signing it.

If possible, have the contract looked over by a lawyer
Because a factoring service can tie up a significant portion of your business’ monthly accounts
receivables, if not an entire month’s worth, it is highly recommended that you have a lawyer go
over the factoring contract before you lock yourself into the agreement.

6 Tips for Every Business Needs To Know

While we feel that our factoring buyer’s guide is comprehensive, we want to leave you with a
few tips that you can use to save money and have an overall better experience when choosing
a factoring company for your business’ funding:

Tip Why It Is Helpful
Get a quote from multiple factors and Small business factoring is like any other large
negotiate transaction in some respects – there is usually
“wiggle room” to negotiate a better deal, especially
when you take the time to obtain a factoring quote
from different companies. Bottom line, factors
rely upon your business to stay in business, and if
you have long-term needs for this type of business
financing or you shop around and find a better
deal at with a less-suitable factor, you may be able
to work this to your advantage and save some
money
You can negotiate for more money up front Just because a factor states that they offer 75% to
80% of the total value of your accounts
receivables up front does not mean that you
cannot get 90% initially. Factors will generally
allow for a bigger up front advance in exchange
for a higher discount rate
Use brokers to find the best deals Brokers can be valuable assets for companies
who do not have the time or expertise to locate a
suitable factor for their business’ accounts
receivables financing. In exchange for a small
fee, brokers can help you find a factor that will
work with you in your situation, and usually know
the companies to avoid, which can save you
countless headaches as well as temporary
financial woes
Use fewer invoices for higher amounts In many cases, business' do not need to finance
all of their monthly invoices. By submitting fewer,
higher-dollar invoices to factors instead of several
low-dollar invoices, you are decreasing the factor’s
workload and thus may be able to receive a lower
discount rate
Notify your clients beforehand While factors do, indeed, notify your clients that
payments should be made out to them instead of
to your business, it’s generally recommended that
you inform your clients of this change of payment
venue yourself; this can help to alleviate any
unpleasant surprises and allows your clients to
plan for these changes ahead of time

Opt for an open-ended factoring contract While you may be looking for one-time funding
through invoice factoring today, there is always
the possibility that you will use factoring as a
business financing option in the near future. By
locking in an open-ended factoring agreement,
you can save yourself hundreds or even
thousands of dollars in the future by bypassing the
need to pay setup fees for additional advances
through the same company

Choosing the right factoring company for your business is an important decision, one that has
the potential to catapult your business to the next level. Factoring is a viable solution that has
a large number of benefits that work for a variety of businesses today, both large and small.
We hope that our business-factoring guide has shed some light on the process for you. We
have outlined what to expect, what to know in advance as well as some of the common pitfalls
for this business financing option. When you are ready to make the move, feel free to get a
quote from reputable factoring service providers in your area.

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