(PRWEB) August 10, 2004
Many small and medium sized business that may not qualify for conventional bank financing are not aware of a phenomenal way of receiving business capital through a method called accounts receivable factoring.
Although still largely unknown, the factoring industry is quite large (with over $200 billion factored annually) and has been used as a financial service by multi-billion dollar corporations for many years. Only over the last several years has this service been made available to small and medium sized businesses as an alternative to traditional bank financing.
Factoring works like this: A funder that purchases a companyÂs accounts receivables at a nominal discount is called a Âfactor.Â A factor works by providing a cash advance based on the total value of the invoices that you provide as collateral. This service is useful to a business that cannot afford to wait 30, 60 or 90 days to collect payment from their customers because cash is needed immediately. Typically, a company will receive 80 percent of the invoice value upfront. The remaining value is received once the client pays the factor, minus a factoring fee. This fee can be structured in any number of ways, but it generally nets out to be about three to five percent of the invoice value, depending on the terms of the invoice and the credibility of the invoice debtor(s).
A company can qualify for invoice factoring by satisfying two basic conditions: First, you should have no existing primary liens on your business or on your accounts receivables. Essentially, this means that no other company should have a claim on payments when they come in.
Your customers must also be credit-worthy. Factoring only works successfully if clients pay their invoices. Your company's creditworthiness will not necessarily factor into a decision to approve or deny your account. Instead, the factor will focus on evaluating your clients to determine whether and how quickly they will pay their invoices.
There are many factoring companies ranging from small financial service businesses to large banks. However, not all will take your business. Some specialize in particular industries like medical or manufacturing. Others may require a certain minimum per invoice or total invoice amount before they will conduct business with you.
Take the time to compare your options when choosing a factor. The pricing structure should be a critical point of comparison. Using likely customer payment scenarios, calculate what the total fees will be for the different vendors.
Deposit or application fees and the advance rate and monthly invoice minimums should also be explored. Finally, check whether a minimum length contract is required and, if so, what penalties are assessed if you break it.
Definitely inquire about how the factor handles unpaid invoices. Some factors will assume all the risk and not require you to repay the factor if the invoice is not paid within a set period of time in what is known as non-recourse factoring. On the other end, recourse factors will require repayment of funds plus the factor's charges. Be cautious of companies that promise unrealistic fees and immediate cash. The truth is, after your account is set up (usually between a week to ten days) then, and only then, are you eligible for same-day funding.
Finally, put yourself in your customers' shoes and inquire about what the invoice handling process will be like from their perspective. Look for a company that is as focused on customer care as you are. You should know that many factoring companies adhere to "notification factoring" where it is clearly indicated on the invoice that payment should go to the factor and represent themselves as an accounts receivable management service that has just given your business an unlimited credit line of credit.
If you think your business may qualify for a factoring account or other non-traditional type of business funding, please call Funding Network of America at (800) 809-0088 or visit our website at http://www.Funding-Network.com for a FREE analysis of your cash flow needs.
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