Invoice Factoring Month

Jun 102010

In hopes of bringing a bit more order to this website, we’ll be focusing on one topic this month. For the next thirty days we will be focusing on invoice factoring. This means that during the next thirty days (June 10 – July 10) any questions you ask about this topic will be covered. If I don’t know the answer, then I’ll find it out through emails, phone calls, searching the Internet, whatever it takes.  In addition, we have a special offer for any invoice factoring companies out there (read below for more information).

Special Offer for Those who Own or Work with an Invoice Factoring Company

Because we are going to find out just about everything there is to know about invoice factoring, we’ll also want to find out a few good locations to perform this type of work. With that in mind, if you want your company to be covered during this week please send me an email at clockworkaccountant (at) gmail (dot) com. The first few factoring companies to respond will get a complete post dedicated to their company (email for details, it is free).

For Those Wanting to Learn More about Factoring

If you have a question about factoring invoice then simply go to the bottom of the page and fill out your questions in the comment box. I would prefer to have all of our discussions there so other people can benefit from your questions. Before you ask basic questions, you may want to look around at some of the articles on this website already posted. This one on factoring receivables is a good place to start.

For those of you who may have stumbled across this page without the foggiest of idea of what factoring is about, I’ll provide a brief description here.

To understand why people started factoring is not difficult. Successful businesses that were making a lot of sales on credit were starting to realize that there cash position was undesirable. At first managers were baffled because sales were increasing and so was the need to buy more inventory, but cash flows were insufficient to buy more inventory. Managers kept financing their business needs with more money from the banks but businesses that were growing extremely fast could still never seem to have enough cash.  That is when banks and investment groups realized that these fast growing companies could sell them their invoices or receivables at a discounted price. This was a win-win situation because the banks made a profit off the interest without taking considerable risk, and the companies received cash upfront for their sales on credit.

Note that discounting is slightly different than factoring. You can read about it at this invoice discounting post.

That sums up our discussion on the topic today, feel free to leave your comments and questions below and hope to see you this week.

Invoice Factoring Company

Mar 102010

Looking for a Good Invoice Factoring Company?

So, your company has decided that accounts receivable factoring may be a good option. Below is a quick look at some of the factors you may want to consider when looking for an invoice factoring company.

Initial payment: Most invoice factoring companies will make an initial payment for your accounts receivable; usually somewhere between 60% to 90%. All other things the same, most companies prefer more cash up front to less (in fact cash is probably the reason you are debating factoring invoices in the first place). If you can find a company that will give you 80% or more of the face value of your invoices then you are probably dealing with a reputable company. Note: certain characteristics about your invoices may make a factoring company want to give you less than this even though the company is acting ethically.

Second Payment: After the factoring company has collected the money from your accounts receivable, they will send you a second payment (if they don’t, then you should be really worried). This payment is for the remaining 40% to 10% of the balance. When considering which company to hire, poke around a little bit and see how long it takes them to send you that second payment from the time they receive it from the customer. If they are holding on to it for a significant period of time, then it really doesn’t do your company much good to factor invoices because you are still waiting for cash.

Fee: Invoice factoring companies need to make money as well. They are not running a charity service that simply infuses companies with cash. They charge a fee for advancing your company money. This fee is usually around 2% to 4% per invoice per month. Doing some quick math should show you that this is quite a high rate for a loan, but it may be a lower rate than some other cash advance options. If a company is charging your company much more than 4% to factor invoicing services, then you may want to start shopping around.

Collection Services: Your company has spent its sweat, blood, and tears trying to form relationships with customers so they will continue to shop with you. In fact, you may have decided to give your customers a lenient credit policy so that they would continue working with you; and this may have led you to need to do invoice factoring in the first place. Remember that these factoring companies may not be as accommodating when they are collecting money from your customers. Try to see if your company can still be the one collecting from customers if you are worried about this. Or at the minimum make sure that your customers will be treated respectfully from the factoring company’s collectors.

Hope this gives you some ideas of what to look for when shopping around for a factoring company.

Invoice Factoring

Feb 272010

Recently you may have heard something about accounts receivable factoring or invoice factoring. You may have wondered what exactly is factoring. Factoring refers to the selling of your company’s accounts receivable at a discounted rate.

At this point you may be wondering why anyone would want to sell their accounts receivable for less than their face value. Two reasons come to mind.

The first one, the more common of the two, is that a company is in dire need of cash. Most business experts agree that lack of cash is the number one reason that business fail. Let’s look at an example of when a company might want to consider factoring invoice.

A start-up or growing company that sells luxury yachts is having a blockbuster year in terms of sales ($10 million dollars in revenue). However the nature of the luxury yacht industry is that most clients are not going bring cash when they buy the yacht (if they do, then as the owner of the business you might be a little worried).  The business owner has sold out his entire inventory and does not have the cash to buy more. The poor guy barely has enough cash to pay his employees. He has already taken out a loan to finance the yachts and his debt ratio makes it so nobody is interested in lending him more money. He does however have $10 million in accounts receivable.

At this point the owner may want to consider business invoice factoring (selling his accounts receivable at a discount). This would allow him to pay his employees and purchase new inventory.

The second reason to consider invoice factoring services is widely considered unethical. This is done when as an owner you know that your accounts receivable are not worth much and you feel you can get more money from a factoring company. This is hard to pull off because most factoring service companies do their homework before buying accounts receivable.

Benefits of Factoring Invoice Discounting

Probably the biggest benefit of selling your accounts receivable is that it frees up some much needed working capital. This is especially true for companies that have a loose credit policy and a lot of money tied up in inventory.

Another advantage of factoring is that it shifts the burden of collection to someone else. After you sell your AR it is up to the factoring company to collect. Warning: they may be more brutal with your customers than you would be so make sure to get to know the factoring company’s collection process before selling your AR.

Disadvantages of Invoice Factoring

Cost is the number one disadvantage. The discount rate will vary from company to company, but in many cases selling your accounts receivable will be more expensive then opening up a credit line. Most companies should view factoring as a last result – before bankruptcy.

Customer service is another big disadvantage. If your company relies on strong relationships with its customers, then you will want to consider how the customer will feel if someone else is going to be contacting them about their payments. In many cases this is a non-issue because your customers are making their payments on time. However, if a customer falls behind on payments, remember that the invoice factoring company may not treat the customer how you would.

Another interesting disadvantage is that it complicates the accounting. If you don’t have some skilled accountants, then they may not know how to appropriately handle this type of transaction. You can always work with an accounting services firm to avoid having this problem.

Who Collects /Deals with the Customer Now that I’ve Factored My Accounts Receivable?

In all cases your company can still have contact with the customer and try to make repeat sales. In some cases you may still be the one that collects payments, but then you have to send them to the factoring company. In other situations, it will be completely up to the factoring company to make collections. Make sure to carefully examine the contract and work this out before engaging in factoring.

What is the Cost of Factoring Invoice?

To better understand the cost of invoice factoring, it helps to see an outline of how everything takes place.

1.    Your company provides goods and services on account.
2.    Your company sells these accounts to a factor. At this point the factoring service usually gives your company somewhere from 60-90% of the invoice value.
3.    The customer pays off his/her account.
4.    The factor pays your company the remaining 10-40% but with a fee.

This fee is where the factoring company makes its money (and hence is the cost to your company). This fee is usually around 2% to 4% of the invoice per month. This can add up to be an expensive way of financing, but you also don’t have to wait to receive the cash from your accounts receivable. As with most business decisions you need to do a cost-benefit analysis to see if accounts receivable factoring is a good idea for your company.

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