Factoring: What You Should Know
Is the sale of accounts receivable invoices to a third party who then assumes the obligation of collecting the invoice. Factors can move quickly to get funds to a business but are usually the most expensive way to finance accounts receivable. Most factors initially pay 70% to 90% of the invoice amount followed by an additional payment when they collect the invoice. Ultimately, factors discount the invoice from 2% to 5% or more. Factors advance funds under one of two conditions: where the factor assumes all the liability for the invoice (non-recourse) or where the factor can come back to the business should the invoice become uncollectible and require reimbursement (recourse).
An example of a designer who used factoring to jump-start her business is Mary Norton, designer of MooRoo Handbags. A trade show at the Javitz Convention Center resulted in orders worth $65,000. Proof of the orders got her a $20,000 line of credit from a bank (–this is the factoring part–). The $20,000 was invested in renting a warehouse and buying equipment. To give you the rest of the happy-ending story, MooRoo opened a store in South Carolina and watched sales double each year as the customer base increased 40% each season. The projected sales six years after MooRoo began were $2 million.
Factoring has many advantages over traditional bank loans. Factoring can solve your cash flow problems and protect your business against devastating bad debts. The Bank guarantee the creditworthiness of your customers, and you don’t have to wait to get paid. The Bank collect payments, absorb credit losses, and make cash available to your business whenever you need it. If your customer doesn’t pay, it’s The Bank’s problem, not yours.
Unlike conventional accounts receivable financing, The Bank provides tangible credit protection and frees you from collection and receivable bookkeeping chores. You save on salaries and management expenses. With The Bank as your credit manager, you can spend time building and managing your business instead of worrying about how to pay the bills. Depending on the particular requirements of your business, Bank’s can custom tailor our services to a perfect fit.
This service enables you to draw cash as soon as merchandise is shipped and invoiced to an approved buyer.
The Bank offers clients a non-borrowing credit, collection, and receivables management service. You may avoid interest charges if you elect to receive your payment after The Bank has been paid by your customers. This service provides you with the benefits of credit protection and economic bookkeeping. If The Bank approves the sale, you’ll be paid, whether your customer pays us or not.
The Bank may also offers a hybrid service that provides advances against sales and receivables management services without credit protection. If your customers are unquestionably creditworthy, you may not need credit protection, but you may like the idea of borrowings capped only by your receivable growth. Notification finance enhances your cash flow by giving you the ability to borrow the day you ship. Collections will be quicker and more reliable.