Accounts Receivable Factoring is a way of generating money for your business when all other sources have been exhausted. Is expansion needed but there is no money for materials? Do you need to make payroll and pay other expenses during a down cycle? Have you already borrowed money but could use more? These are all excellent examples of when factoring can be the solution to your business need.
What is Factoring?
Factoring is a legal agreement between a financial institution and a business owner.
Your business receives advances from a financial lending institution based off of accounts receivables your business is expecting but hasn't received yet.
How does factoring work?
Your business sells its goods and services to its customers. Not all customers are cash customers. They are invoiced for the goods and services they receive. Once the customer receives the invoice, there is a specific time frame they have in which to pay (typically 30 days).
The income your business is owed becomes an Accounts Receivable (AR).
Accounts Receivables are legal obligations and are considered as assets. The problem with AR's is the time delay between the invoice and the actual receipt of payment. This can be anywhere from 30 to 60 days and sometimes longer.
This is where factoring comes in.
Many financial institutions (typically not your local bank) are eager to advance money to business owners in return for the opportunity to collect their AR.
Upon coming to an agreement with the funding source, a business owner may receive a percentage of his AR's in funds for use within 24 to 48 hours. This is tremendous for a company because it takes care of any cashflow problems by not having to wait 30 to 60 days for their money from customers.
What about invoice collections under a factoring agreement?
Invoices are sent with specific instructions to send payments to the funding source/factor.
The funding source performs all collection functions which includes record keeping and the handling of slow paying customers.
What does factoring cost?
Since factoring isn't a loan to be paid back, you keep all the money advanced to your business from the funding source. As payments are collected by the funding source, a percentage is kept by the funding source for the services it agreed to provide in exchange for the advance to your company. The remaining funds are sent to the business owner. This type of arrangement usually gives a company a better return than the Prime interest rate you would be charged by many banks.
If a recourse clause is part of the factoring agreement, the business owner is responsible for repayment of a portion of advances made on uncollectible receivables.
If there is no recourse clause in the factoring agreement, the funding source accepts all risk involved in the collection of the receivables.
Is factoring legal?
Yes. Factoring is completely legal and is done by many businesses as well as large corporations.
Latest Accounts Receivable Factoring News
March 13, 2007
Platinum Funding Group announced its funding of two growing apparel importers and distributors, T-Shirt Time, Inc. and PEBO, LLC, both based in New York City. The companies are using the working capital as they team up in order to grow their respective businesses.
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