Accounts Receivable Factoring Questions
Here are some of the most common accounts receivable factoring questions I am asked all the time by fellow entrepreneurs and my website visitors.
1) What is Factoring?
When a factoring company, also called a factor, buys your receivables in exchange for cash today. They take a small cut upfront, and you get the rest of the cash usually within 48 hours or less.
2) How do you Execute Factoring?
First, you sell a product or service to your customer or client, second, they owe you money for the services, third, you send a copy of the invoice to the Factor either via mail or fax, fourth, the Factor will review it and tell you whether they can pay you upfront for it. If yes, you get the money from the Factor, and they collect from your customer whenever the customer's invoice is due.
3) Do you need to provide the Factor with detailed Financial Statements?
Most of the time, NO. The factor buys your receivable based on the actual receivable, not your company's financial position.
4) Are there contracts involved?
Not all the time. In fact, most of the time there are no contracts. You decide which invoices you want to sell on an as needed basis.
5) What are the fees and costs involved?
These vary. Typically anywhere from 1% to 5% of the invoice price. The Factor will pay you up to 80% of that amount up front, and when they collect payment from the customer, they send you the remaining 20%.
Example: Invoice Amount: $1,000 Factor's Fee: 3% Total Amount You Get: $970
You get 80% upfront or $776, and the remaining $194 later for a total of $970.
6) What is the impact on your Clients or Customers?
No impact in when the invoice is due and for how much. The payment address to where they send the payment to will change. The Factor will send them a notice indicating where to send the payment.
7) What if Your Customer / Client Does Not Pay?
If your accounts receivable factoring agreement with your Factor is with recourse, you will have to pay them the defaulted invoice. If it is non recourse, you are off the hook. It is now the Factor's loss since they assumed the risk when they bought the invoice from you.
8) Is the Factor a Collection Agency?
9) What is the main reason businesses factor or sell receivables?
To get cash today. Sometimes customers don't pay for days, up to 90 days depending on the credit terms you give them. When you sell receivables, you get all the cash upfront. You can use this cash to get funds you need now, to grow and expand, or anything else.
10) Do you need a Collateral?
Depending on the Factor, they may or may not require a collateral. Some companies do not ever require a collateral.
11) Do you need to tell your clients anything?
It is good practice to do. Factoring companies are usually good at coaching you into how to do this. They have templates/letters that you can use. Ask your Factor and they will walk you through it.
Do you you have more to add? Email me. Let's ensure this list is as comprehensive and helpful as possible for those who see it after you!
Hope you found clear answers to the most common accounts receivable factoring questions often asked by business owners.
I wish you all the best, and please let me know if I can help you.
Curt Matsen, CPA