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its not always in the name

Factoring to the Rescue

As banks have reported tightening their lending standards there will be more and more demand for alternative lenders for the last half of 2020.  As financial brokers, your expertise will be needed as fewer companies qualify for conventional lending.  Your customers will be counting on your expertise of understanding the many types of commercial financing products available.  Factoring is an ancient form of financing that is currently in great demand but is often misunderstood.

What is Factoring?

Factoring is the sale of a businesses invoices to obtain cash. Independent factors are more focused on the credit quality of the business’s customers than the businesses financial performance.  For business’s that have been affected financially by the crisis but have a strong customer base, factoring can be a great solution.

Who Is Good Candidate for Factoring?

Factoring prospects are either B2B or B2Govt business with a strong customer base.  Common industries include staffing companies, manufactures, fabricators, distributors, oil & gas service companies, telecommunications, wholesaler, and service companies.  Most factors exclude construction and third-party medical accounts receivable companies, but specialists focus on these niches.

What Are the Steps?

A true factoring facility is not a loan.  The client sells their invoices to the factoring company and assigns the payment to the factor.  It is critical for the factoring company to have first filing position against the clients accounts receivable.  After establishing that there are no prior UCC liens against your prospect, the next step is running credit reports on the customers to approve them.  After the customers are approved the factor will verify the outstanding invoices.  After all these steps are done the factor is ready to fund your prospect

What Does the Contract Look Like?

This is where factoring companies will greatly vary.  You will want to help your prospect find a flexible factor that does not require minimums, or that all invoices must be factored.  Most factors usually advance 75% to 90% of the invoice amount. All fees, called a discount rate, should be plainly stated in the agreement.  Most factors work with a one-year contract.  Some factors will require a minimum to be factored each month. Other factors will cap the outstanding with their client.  Its important to match your prospect with the right factor.

Funding

Your client will continue to do business as usual: shipping products, completing services, and invoicing their customers.  Your client then sends the invoice to the factor and a verification from the customer of the invoice.  After approval, the factor will advance the client the agreed amount (75%-90%) generally within 24 hours of approval.  When the factor receives payment from the customer the factor takes their fee from the “hold back” and refunds the client the remaining balance.

Some factors can get a prospect funded in 3-4 days, then funding is usually within 24 hours of submitting invoices. 

Selecting Your Factor

The longevity and reputation of your factor is important.  Ask about what industries the factor prefers and their source of funding.   Find out what size deals the factor is comfortable with. It is critical to discover what communication the factor will have with your client and their customers.  

American Receivable was founded in 1978.  The original founders still manage ARC (American Receivable Company) today.  We have built our company on a model of transparency, with a goal of helping our clients to eventually become cash flow positive without our assistance. Trusted referral partners have been critical to our success.   ARC offers the most competitive brokerage rates in the industry. To learn how American Receivable can help your business become cash flow positive, call Jack Stieber or Brad Gurney at 972-404-4726 or call complete our quick application form.