FACTORING

1. What are the most important principles of Factoring?

1.1. Although the factoring application process varies by factoring company, two things always happen early in the application process. First, the factoring company requests a copy of your most recent Accounts Receivable Aging Report (A/R Aging). Second, the factoring company performs a preliminary Uniform Commercial Code (UCC) search in your business. Arguably, these are the two most important preliminary resources that factoring companies consider when evaluating clients. Let’s look at them in detail. Accounts Receivable Aging Report This report shows all outstanding invoices and categorizes them based on how long they have been unpaid: “Current,” “+30,” “+60,” and “+90.” “Current” lists invoices within terms. “+30” lists invoices 30 days past terms. Similarly, “+60” and “+90” list invoices 60 and 90 days past terms, respectively. This report helps the factor determine which invoices may be eligible for factoring (provided they pass the credit review). Most factoring companies will only buy invoices that are less than 60 days old. The UCC Search Specifically, factoring companies search public records to see if the client’s invoices (accounts receivable) have been pledged as collateral for another transaction. Most business financing transactions that require collateral (e.g., a business loan) have a UCC filing. The UCC search is important because factors require first position on the invoices that they are funding. Note that these two things are not the only things to worry about when applying for factoring. You should avoid these mistakes and roadblocks. Lastly, you can improve your chances of success by using this trick.

2. Differences between Factoring and Bills Discounting?

2.1. In the case of Bill discounting Debt, an assignment is not available. But, in the case of Factoring Debt assignment can be exercised. In the event of bill factoring the Financier’s source of income is only subject to Charges of discounting or in other terms the interest associated with it. But when it comes to factoring, the financier is entitled to receive remuneration for the financial services and receives a commission for other associated services related to the event. In bill discounting, the assignment of debt option is not available. But in the event of factoring the firm holds the option of debt assignment in hand for its purpose. No certain rules are provided by the law for the factoring method. But in case of bill factoring Negotiable instrument act 1881 is mandated as a guideline for ending the process. Two major components for both the process is recourse and non-recourse. The first component recourse is entitled to bill factoring which means if the customer somehow fails to deliver the price of the goods in official term defaults to pay. And then the borrower of the money must pay the amount of money which the particular customer is not able to pay. In factoring both recourse and nonrecourse components come into existence. The term non-recourse means the borrower is not entitled to pay any money if one or more of his customers are in a position of not being able to pay. And the buyer of the accounts receivables takes full responsibility regarding the purchase and cannot make the borrower liable for anything short of his financial expectation.

3. Differences between Factoring and Credit Insurance?

3.1. If you are worried that your invoices won’t be paid – because you’re exporting to a newer company, or because you’re working in a politically unstable region – trade credit insurance is what you’ll want. Even if your client never pays you for your goods or services, you’ll be able to recover most of the value of the sale, and ensure your business stays in good financial shape. In contrast, invoice factoring should be used when you’re sure that your clients will pay eventually – but you’re having short-term cash flow problems. Maybe you’ve got a few dozen Net 60 invoices out there, but you need to make payroll and invest in some upgraded equipment within the next month. By using a factoring company, you can access the money you’re owed more quickly, and use it for mission-critical operations and other business needs. Just don’t think that you’ll be able to “dump” bad debt with invoice factoring – The use of recourse factors mean that this is simply not possible.

4. What is the factoring?

4.1. Factoring is a form of financing that helps companies with cash flow problems due to slow-paying clients. It allows your business to finance invoices, which improves your company’s working capital.

5. What are the implicated parts?

5.1. The following steps are involved in the process of factoring: The seller sells the goods to the buyer and raises the invoice on the customer. The seller then submits the invoice to the factor for funding. The factor verifies the invoice. After verification, the factor pays 75 to 80 percent to the client/seller. The factor then waits for the customer to make the payment to him. On receiving the payment from the customer, the factor pays the remaining amount to the client. Fees charged by factor or interest charged by a factor may be upfront i.e. in advance or it may be in arrears. It depends upon the type of factoring agreement. In case of non – recourse factoring services factor bears the risk of bad debt so in that case factoring commission rate would be comparatively higher. The rate of factoring commission, factor reserve, the rate of interest, all of them is negotiable. These are decided depending upon the financial situation of the client.

6. Advantages of Factoring

6.1. For a fee, factoring companies can unlock funds tied up in unpaid invoices so that your business receives funds without waiting for customers to pay. This makes cash flow management easier for the businesses that use factoring. Most factoring providers will manage credit control, too, meaning that the business no longer needs to chase customers for invoice payment - something that can save a lot of admin time.

7. Disadvantages of Factoring

7.1. Most factoring companies lock their customers into a long contract whereby all of their sales ledger must be funded through the factoring facility, and these contracts are often costly and difficult to get out of. Invoice factoring companies will often quote favourable rates and fees at the outset but the addition of extra fees (or ‘disbursements’) on a monthly basis adds considerable cost and makes this an expensive form of finance. Many factoring facilities are unsuitable for businesses which deal mostly with one or two main customers. This is due to factoring companies stipulating low ‘concentration limits’ . There are often also limits on invoices due to foreign customers for export activity . A lot of business clients prefer to maintain their own credit control rather than enter into a factoring facility that insists on chasing their customers for payment. That is because often it is important to small businesses to maintain healthy and friendly relationships with their customers.