Updated: Sep 14
Factoring is a form of commercial financing that is commonly referred to as Invoice Factoring, Invoice Financing, Accounts Receivable Financing (amongst others). This financial transaction enables a Company to receive immediate advances against the gross value of the commercial receivables (not consumer invoices) by selling their Invoices to a 3rd party known as a Factoring company.
For Example, once a company provides goods or services to another business, an Accounts Receivable (Asset) is generated. Typically, the invoices take around 50 days to get paid by their Customer also known as Account Debtors. Factoring Companies will advance 80%-97% in 24 hours of the product delivered or service rendered. The gap is bridged between invoice and payment which provides a liquidity injection to the company as often as invoices are submitted. So instead of waiting roughly 50 days for their customers to send a payment, the factoring company makes the cash available overnight.
So how do I know if my company is eligible to receive Invoice Financing or Accounts Receivable Factoring?
If you can say yes to these questions, you may be a fit:
1. Do you sell your goods or services to businesses?
2. Do you have more in open Accounts Receivable than any debt secured by Accounts Receivable?
3. Are you current with your federal taxes or in good standing with your payment plan?
4. Do your customers typically pay 100% of their invoices?
5. Is your obligation to your customer fulfilled upon delivery of the product or services rendered?
6. Are you wanting a credit line that will increase as your business grows?
Some reasoning behind why these questions are asked by the factoring business development officers to qualify the business:
Do you sell your products or services to businesses?
Factoring companies take the risk on the ability of your customer to pay; NOT the credit risk of you as a client. Therefore, it is very difficult to determine the creditworthiness of individual’s ability to pay consumer invoices. Businesses, on the other hand, are easier to assess and validate their financial positions because of public records. Individual credit reports, however, are confidential and you need authorization to pull.
Do you have more in open Accounts Receivable than any debt secured by Accounts Receivable?
Factoring companies must have the ability to collect the receivables free and clear of any liens or encumbrances. The factoring company must file a lien on and be in a first senior security position on the Accounts Receivable at a minimum. If you as a company have bank lines that are secured by the A/R, (especially revolving lines of credit) they must either be paid off at closing or an inter-creditor agreement must be established before the factoring company can fund your company. The factoring company will use some of the proceeds of the A/R Funding to pay off the existing credit lines.
Are you current with your federal taxes or in good standing with your payment plan?
If you fall behind paying the IRS on your Federal Taxes, the Government will file a lien on your Assets. In the event a lien is filed, the factoring company will need to work with the IRS and Resolution Officer to develop a plan to take care of the back taxes. It is important to the Factoring company because the lien can be filed in front of the Factoring Company’s UCC filing.
Do your customers typically pay 100% of their invoices?
When your customers pay less than the 100% owed it deteriorates the Invoice Factoring Company’s collateral position causing the financing company to reduce the advance rate and increase the factoring rate. In most cases, the Accounts Receivable is the only collateral the factoring company has so it is important the payments come in close to the invoice amounts. The common term expressed by lenders is the dilution which is the difference between Gross Sales and Net Sales. Most invoice factoring companies do not finance Insurance Related Receivables for this reason.
Is your obligation to your customer fulfilled upon delivery of the product or service rendered?
Factoring companies wish to finance invoices where payment from your customers is not contingent on future work being complete. The industry term is offset. If your customer can offset/withhold payment due to conditions not being met in a contract, this can pose a problem for the factoring company. Construction companies often progress/milestone bill their jobs as they complete a project. If the project for some reason does not get complete, the owner of the project has the right to withhold or offset payment of invoices. This jeopardizes the factoring company’s ability to collect on the invoices that were previously financed. Most factoring companies will not factor for the construction industry because the risks are very hard to mitigate.
Are you wanting a credit line that will increase as your business grows?
One of the great things about a factoring company is they have an invested interest to see your company grow. Gone is the day where you cannot increase your credit facility because your customers are ordering more product, you have a strong pipeline of new prospects about to order, or your financial statement is not pristine. Most A/R Lenders, unlike most banks, will increase your credit line if the customers are paying on time regardless of most financial metrics. If the accounts receivable is performing the invoice factoring company is financing. This not only gives you the ability to maintain strong cash flow so you will stop worrying about when your customers will pay, but also have the credit line needed to support your growth and stabilize your balance sheet.
Porter Capital Corporation is a financial services and invoice factoring company that provides many types of financing including working capital credit lines for companies with annual revenues between $100,000 and $100,000,000 through Asset-Based Lending and factoring services. Since inception in 1991, we have funded over Five Billion in credit facilities.
WHEN TO THINK OF PORTER CAPITAL CORPORATION
If your small business (or larger) has Accounts Receivable owed from other businesses and valuable inventory, we can leverage these assets to inject the capital needed to fund operations, fulfill orders, and pay off existing debt. Our flexible solutions, quick response time, and competitive pricing provides a financing framework that companies have utilized for almost 30 years. Fill out a form today!