About Factoring
Factoring is one of the
quickest methods for companies to raise working capital.
Used by almost every industry, factoring allows your company
to raise the needed capital for expansion/growth,
restructuring or survival!
Why wait 30-60-90 days for
your customers to pay you?
Factoring allows your
company to get the money from its customers now - not weeks
or months from now!
Factoring is converting
your accounts receivables/invoices for cash, thus allowing
your company to receive the needed capital quickly!
It does not require
additional collateral and does not create debt!
More about factoring
The origin of the factoring industry has been traced to the
days of the Roman Empire or even earlier, but the industry
as we know it today in the United States goes back only
about 200 years to the early nineteenth century.
Factors evolved from U.S.
selling agents for European textile mills. The European
mills used the agents to sell their fabrics in the U.S. and
paid the agents a commission on sales. The agents also
warehoused merchandise and did the shipping for their
European clients. As these selling agents prospered and
became more familiar with their own customers, they began
taking on the job of establishing credit terms and advancing
funds to the European mills. The oldest documented factoring
firm traced its roots to 1810 and several others were
established in the first half of the nineteenth century.
Traditional or old-line
factoring is fairly straightforward and is designed for
long-term relationships. It involves the purchase of
receivables without recourse and with notification to the
client's customer. The factor buys the receivables created
by a client's sales and then collects the proceeds directly
from the client's customer. After the factor buys a
receivable, it assumes the credit risk on that receivable.
If the client's customer doesn't pay because of a credit
problem, the factor must assume the loss.
Essentially, an old-line
factor offers its clients credit protection, collection,
bookkeeping services and financing. In addition to advances
against receivables purchased, once a relationship is
established, factors often provide clients with
over-advances during peak shipping seasons. Factors also
offer financing services and accommodations such as
inventory loans, letters of credit/import financing and
equipment financing. Export financing is also available
through alliances with international factoring networks.
Principally because credit guarantees are important in
textiles and apparel and because of factoring's roots in the
textile industry, about 70 percent of the volume of old-line
factors is still in textiles, apparel and related
industries.
Since the factor takes the
credit risk on the sale, it must first approve the sale
through its credit department. Thus, the client is relieved
of the cost of running a credit department. Because of the
credit guarantee, old-line factoring is limited to
industries in which credit information is available. The
charge for the credit and collection service, called the
factoring commission, varies with the sales volume of the
client, the size of the transactions and competitive
conditions.
The economic rationale for
the factoring service is fairly obvious. With thousands of
suppliers selling to the same customer, without factoring,
each seller would have to do its own credit appraisals and
collections. This involves an incredible duplication of
effort. With factoring, a single credit department operating
for hundreds or thousands of suppliers, eliminates much of
the duplication and promotes efficiency. And with the aid of
electronic data processing, the cost of the credit and
collection operation has been reduced exponentially and the
savings are passed on to the client. Technology has
revolutionized the industry, eliminating tons of paperwork
and providing clients with valuable on-line information. The
system can generate a host of reports on sales analysis and
other information to help a client analyze its own business.
It should be noted that the
factor's guarantee, is a credit guarantee and does not apply
to anything other than the financial inability of the
client's customer to pay. The guarantee does not apply to
merchandise disputes between the buyer and the seller. If
the receivable is not paid because of buyer claims of
defective merchandise or untimely delivery or any other
dispute involving the merchandise or its delivery, the
factor will look to the client (the seller) for
reimbursement.
The credit and collection
service is just half of the business of the old line factor.
The other half, and for many clients, the more important
half, involves advances of funds against the purchased
receivables. If the customer wants a cash advance, it can
borrow from the factor. The interest on the loan is in
addition to the commission and is usually at a rate
competitive with the cost of a comparable bank loan.
Many factoring clients are
maturity or non-borrowing clients. They wait until the
purchased receivables are paid and then may collect the
proceeds from the factor. If the client leaves the funds
with the factor after collection, the factor will pay
interest on the balances at a rate comparable with the
factors' cost of funds. These balances may be drawn upon
when needed.
Traditionally, factoring
was done on a notification basis. The client's customer is
notified that the account has been turned over to a factor
and the customer's payment should be made directly to the
factor. However, a non-notification agreement can be worked
out. The factor would still purchase the receivables
outright after doing the normal credit check of the
customer, but the customer wouldn't be notified that its
account has been sold. If the client borrows money, customer
payments in non-notification accounts are usually sent to
lock-boxes which the factor administers.
Aside from old-line
factoring, there are as many variations on factoring as
there are entrepreneurs who choose to use the name. There
are commercial finance companies, some of which call
themselves factors, single-invoice factors, purchase order
factors, recourse factors, invoice discounters and
re-factors.
• Commercial finance
companies do not provide credit guarantees, but lend against
collateral, principally receivables and inventory, and are
an offshoot of the factoring industry and go back to the
beginning of the twentieth century. Largely because the
commercial finance companies operate in diverse industries
in contrast with traditional factoring which is still
largely married to textiles and apparel because of the need
for credit guarantees in those industries, it has grown much
more rapidly than traditional factoring. Rather than
purchasing receivables, commercial finance companies take
assignments of receivables as collateral for loans. The
client collects the receivables proceeds and uses the funds
to pay down the loan. Defaulted receivables are the client's
problem (but could be the lender's problem if defaults are
substantial). The lender normally provides enough of a
cushion so that if the client fails to repay the loan, the
collateral can be liquidated and provide full payment.
• Single-invoice factors provide essentially the same
services as the old-line factors but they do it one invoice
at a time. Also, there are very few non-borrowing clients
for single-invoice factoring because a company that factors
a single invoice usually is motivated by the need for
financing.
• While factors finance receivables after they are
created, purchase-order factors provide financing so clients
can fill orders that they cannot finance on their own. Once
the order is filled and is converted to a receivable, a
traditional factor might purchase the receivable and cash
out the purchase order factor.
• Recourse factors are
usually small factoring companies that purchase receivables
often in non-traditional industries where credit information
is not readily available. They buy the receivables but those
that are unpaid are charged back to the client.
• Invoice discounting is
similar to the recourse factoring and is prevalent in
England and some other European countries. The invoice
discounter buys receivables, but rather than focusing on the
credit worthiness of the client's customer, they concentrate
on whether the contract creating the receivable allows sale
or assignment. Non-paying receivables are charged back to
the client.
• Re-factors provide the
same services as old-line factors, but they work with small
companies, sometimes with sales volume as low as $500,000
(generally large factors need at least $3 million in
volume). The re-factors provide the financing, but use the
services of traditional factors to handle the credit
checking and credit guarantees. They make their money from
interest on money advanced and a spread between the
re-factors commission cost and what it charges its own
clients.
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