Rocklin, California
Shaun Rovai
CEO
Factoring services with the professional and personal care that you'll appreciate.
Flexible terms that don't lock you into long-term contracts or force you to factor all your invoices.
These factoring companies strive for excellence and deliver quality service to customers.
Factoring companies that follow best practices and have become industry leaders.
Business relationships with the highest ethical values and principles in the industry.
People that love helping you and your business succeed and grow to the next level.
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IFA
Factoring is not a loan; rather it’s the actual selling or assigning of your accounts receivables to a factoring company. Simply put, invoice factoring, or accounts receivable factoring, solves the cash flow problem caused by your customers’ trade credit terms. Credit terms are typically 30 days or more, depending on your industry and customer.
Invoice factoring basically means that instead of waiting 30, 60, or even 90 days for your clients to pay your invoice, you get about 80 to 90% of the invoice value immediately after you generate the invoice and send it to your customer or factoring company.
What does this mean for your business? How does invoice factoring benefit you? Invoice factoring creates good working capital, helps your business keep more cash on-hand, remain liquid, and better meet operational costs. This improved working capital enables your business to remain liquid and flexible; allowing you to comfortably pay your customers, employees and payroll taxes. In the long-run, invoice factoring helps your company seize growth opportunities and relieve cash crunches and stress!
Invoice factoring works in a straightforward, streamlined manner, transforming your cash flow management and bridging the gap between invoice generation and payment collection. The process begins when you issue an invoice to your client (or to your factoring company). You sell (or assign) this invoice to a factoring company.
The factoring company then provides you with an immediate cash advance, typically around 80 to 90% of the invoice value. You receive this cash without delay. The factoring company then waits for your customer to pay the invoice. Once the customer pays, the factoring company remits the remaining balance (called a reserve) to you, deducting their fee for the service. Sometimes the fee is deducted up-front, from the original advance.
The process is swift, efficient, and designed to keep your business moving forward, unencumbered by cash flow interruptions. Here’s the sequence of steps involved in the factoring process:
A factoring company, often called a ‘factor’, is a commercial finance company that engages in invoice factoring, or the funding of accounts receivables.
Factoring companies provide funds in exchange for the purchase of invoices or receivables. Their funds come from independent sources or from a financial entity such as a bank. Many factoring companies use funds from both.
The factoring company performs the billing and collections associated with the funding of those invoices or receivables. These billing and collection services are a wonderful added benefit to a business, in addition to the invoice funding.
You and your factoring company work together, so that your business improves cash-flow and operates more efficiently. In essence, a factoring company is both a financial partner and a service company for your business.
Finding the right factoring company for your business requires diligence, but it’s time well spent and it can save you a lot of headaches and trouble. Do your homework when searching for a factoring company and never settle for the first factoring company you see in a Google search.
Determining the best factoring company involves assessing these key factors.
Let’s look at the different components of these determining factors.
In addition to finding a factoring partner who will work with you and provide exceptional customer service, you want a factoring company that has expertise in your industry. Although the accounts receivable financing process is fairly standard, there are some niche industries that require expertise.
These niche industries include:
If your business operates in one of these industries, then finding a factoring company that has experience in your industry is vitally important!
All factoring companies have contract terms regarding term length and termination or cancellation fees. Check the cancellation fee policy to make sure you don’t get stuck with hefty fees and costs should you need to cancel the contract.
Our top factoring companies allow quick and easy cancellation notice with “month-to-month” or “no-term” contracts. Other factoring companies require a year or more cancellation notice.
Avoid long-term contracts requiring more than six months cancellation notice. Why risk a bad relationship or conflict that locks you into a contract and prevents you from changing factoring companies or terminating your contract?
Non-recourse factoring
Opting for non-recourse factoring can be an effective strategy to mitigate credit risks associated with customer credit issues. Non-recourse factoring protects you from customer non-payment due to credit issues. Non-payment due to any other reason than insolvency or bankruptcy is typically not covered.
Non-recourse factoring might come with slightly higher fees, to cover any credit insurance or additional risk taken by the factoring company. Understand that non-payment for any reason other than credit issues is typically not covered and will result in you still being on the hook for those receivables.
Minimum volume fees
Ask the factoring company if they require a monthly factoring minimum. Some factoring companies charge a fee if you don’t meet a minimum invoice volume amount each month. This is especially common if you negotiated a low factoring rate based on an expected volume. Otherwise, you should avoid monthly minimum fees, especially if your sales are seasonal or sporadic.
Advance rates
The advance rate in invoice factoring varies across different industries, primarily due to the degree of risk associated with each industry’s nature. Understanding the industry-specific advance rates is important.
To illustrate, trucking companies receive higher advance rates, often above 90%, up to 99% (referred to as fully-funded), due to their predictable and shorter payment cycles.
Conversely, service companies receive lower advance rates, typically in the range of 85 to 90%, due to the higher risk, longer payment terms, and increased service costs.
Similarly, construction companies receive lower advance rates due to their project-based nature and billing methods, as well as higher risk.
Factoring Costs
Factoring costs, often referred to as factoring fees or factoring rates (or less frequently – discount rates), typically range between 1 to 5% of the invoice value.
The variation in factoring costs largely depends on the following criteria:
Factoring rates
Factoring companies determine factoring costs in either of two ways.
Adjustable or time-based rates: The factoring company calculates factoring costs on an outstanding receivables time-basis (e.g. monthly, weekly or even daily basis). For instance, if your accounts receivables are outstanding 45 days, then the rate may be calculated as one 30-day rate plus two weekly rates, and possibly a one-day rate.
Set or flat-rate: The factoring company charges a set rate (called a flat-rate), so that no matter the number of collection days outstanding, the factoring cost is simply the flat-rate times the invoice amount.
Often, factoring companies use a combination of the two methods – time-based rates and flat-rates.
Flat fees are advantageous if your receivables are outstanding for a relatively long period of time, say 60 days or more. Monthly, weekly or daily rates get increasingly expensive as your collections days (or days-outstanding) increase. Adjustable rate can quickly reach 5% or more within a couple months. This gets very expensive quickly!
Accounts receivable factoring is a service as much as it is a financing tool, so you need to make sure you find a factoring company that offers good customer service.
Gauge the attitude, helpfulness and transparency of the factoring company representative. When talking to the company rep, ask yourself the following questions:
Jot down your initial impressions about the company during your conversation. Later, you can review your notes if you can’t clearly remember the discussion.
It’s essential to understand the eligibility criteria and general guidelines for obtaining factoring services. Factoring companies look at the following criteria when deciding to factor an applicant:
Factoring companies have differing levels of various funding criteria. In order to obtain factoring services, you may have to shop around or use the services of a factoring broker (such as FactoringClub).
FactoringClub helps businesses like yours find the best factoring company. We know the invoice factoring business like nobody else. Our services are no-cost to you. We get paid a referral fee from our factoring company partners.
FactoringClub works with a multitude of factoring companies, so we can find the very best factoring company for your business. With over 100 factoring company partners, FactoringClub has the largest network of factoring companies available in the United States and Canada.