| When a business sells a product or service to a | | | | unpaid debt isn't paid by the owing customer(s). In |
| consumer, it's a cash-and-carry basis. They pay | | | | this event the business who sold their invoices |
| and then receive what they purchased along with | | | | may end up reimbursing the factor. So the |
| a receipt. However, when a business sells a | | | | invoices may be with the factor, but the risk |
| product or service to another business this is | | | | stays with the company. |
| known as a commercial transaction. Often times | | | | Non-recourse factoring is far more beneficial for |
| invoices (a.k.a. accounts receivables) are used in | | | | the business owners who wish to factor their |
| such transactions, leaving a window of usually | | | | invoices. The risk of the debtor failing to pay the |
| 30-60 days for the debt to be paid. | | | | debt is assumed by the factor, rather than the |
| Most small to medium-sized businesses recognize | | | | business. No refund options are available, with the |
| the importance of cash flow, which is exactly | | | | exception of defective goods or services. This |
| why factoring is of use to them. | | | | option allows the business which sold the invoices |
| Allow me to give you an example to better | | | | to keep the funds received for them regardless |
| explain the process of selling your invoices. Let's | | | | of default payments. |
| say Joe's Printing provided a client, a local | | | | Often times people confuse factoring with loans. |
| magazine company, with $200,000 worth of | | | | This is a method of financing, but it's not a lending |
| products. Joe's Printing then sends the magazine | | | | service. It's a transaction where invoices are sold, |
| company an invoice for that amount with a due | | | | at a slight discount, to a third party who advances |
| date in 30 days. | | | | the business the much needed funds. If you |
| Unfortunately, not all businesses pay invoices on | | | | owned a struggling business, would you knock 5% |
| time. Even if the magazine company intends to, | | | | off of your invoices in exchange for immediate |
| perhaps Joe's Printing needs to cover rent, pay | | | | cash? |
| employees and deal with other business-related | | | | Banks and lending institutions simply cannot |
| expenses immediately. | | | | compete with factoring. Buying invoices would |
| By factoring this invoice, Joe's Printing could cover | | | | decrease a lender's available capital, limiting how |
| those costs on time and still generate profit. So | | | | much they could lend. And even if a loan secured |
| the company contacts a factoring broker, who | | | | by the invoices was negotiated, the borrower |
| then contacts a funding source who purchases | | | | would be lucky to receive 50 percent of the |
| invoices - known as the factor. The factor then | | | | owed balance of the invoices. |
| offers Joe's Printing $190,000 to purchase the | | | | Factors focus on the creditworthiness of the |
| $200,000 invoice - 95 cents on the dollar. | | | | clients who owe money on the invoices, rather |
| Typically the factor (the investor) will send the | | | | than the strength, credit and financial stability of |
| company selling the invoice roughly 75% of the | | | | the business holding the invoices like banks do. |
| agreed purchase price as a cash advance - in this | | | | Combine all of the reasons already stated with |
| case that would be $142,500. Then, once the | | | | the sky-high interest rates one would face when |
| invoice has been paid the rest is paid to Joe's | | | | attempting to obtain a loan against accounts |
| Printing - $47,500. This percentage may vary | | | | receivables and you can see why factoring is |
| under different circumstances. | | | | most definitely a smarter decision. |
| There are funding sources (factors) who offer | | | | Businesses benefit from factoring because it |
| recourse factoring and some who offer | | | | allows them to match the speed of growth from |
| non-recourse factoring. Recourse factoring, | | | | improving cash flow, pay employees on time, |
| designed to eliminate any risk on the investor's | | | | cover taxes, decrease overhead costs and |
| end, allows the factor to rescind the deal after | | | | providing ample funding for debt restructuring, |
| the invoices have been sold in the event the | | | | acquisitions and expansion. |