What is Factoring?

WHAT IS FACTORING AND FREQUENTLY ASKED QUESTIONS

What is factoring?

Simply put, factoring is the buying of account receivables at a discount. Most factors only deal in business to business invoices or business to government invoices. An axample usually helps.

Company A has a large government contract. This contract means a lot of profit and growth for Company A. The only problem is that the government agency that Company A is dealing with often takes up to 90 days to pay their bills. To fulfill the contract Company A is going to have to commit all of its cash to the project. This creates a problem meeting payroll and buying new materials for other project once the contract has been completed. How many employees will happily wait 90 days for their paychecks? How many businesses will wait 90 days to do business with Company A?

Rather than pass up the large government contract (and all the profit and growth for the business), Company A can contract the services of a factor. The invoice is really a debt owed to company A by the government and is worth money. Once the government contract has been completed, the factor will purchases the Company A's invoice at a small discount (usually around 3% but depending on how long the government takes to pay). The factor will then advance cash to the business to meet payroll and buy new supplies for other projects. This allows the business to re-invest in itself, take on more projects, and grow faster.

How much does it cost?

The fee for factoring is generally around 3% but can increase depending on the amount of time the factor has to wait for payment. Usually a 1/10 of 1% fee is added each day the factor must wait over 30 days for payment. Total fees usually range from 3%-7% of the face value of the invoices factored .

How much cash can I get for my invoices?

Upon receipt of an invoice to be factored, the factor will issue between 80% - 95% of the face value of the invoice. This amount is called the advance rate. The factor retains 5% - 20% to cover the final fee for the service. Upon receipt of the payment for the invoice, the factor will issue what is called the rebate. This amount is the 5% - 20% minus the final fee.

Do I have to factor all of my invoices?

Factor vary in their requirements for how many invoices have to be factored. Generally there is a minimum dollar amount of invoices that are required to be factored each month.