Why is factoring the word of the day in fast flexible business finance? What is Factoring? Who Factors? Why do CPAs love Factoring?

What is factoring?

Factoring is a B2B (business-to-business) transaction where you are selling your invoices for immediate cash. The factor waits to be paid 15-30-45-60 plus days instead of you. With factoring you are giving your customers time to pay but you get paid immediately by the factor. The best of both worlds! You get paid immediately for your accounts receivable instead of waiting.
Why is factoring so popular?
It is the speed and flexibility of factoring, as it is the fastest and easiest way to get working capital for your business. Factoring is also dependent upon your customer’s credit and not your own credit. You get your money within 24-48 hours of submitting an invoice. It extends time for your client to pay either in the USA or internationally. Start-ups to Fortune 500 companies use factoring.
Why is factoring flexible?
Companies can factor one large invoice, aging invoices, international invoices, or continuously created invoices for cash now (in one to three days) instead of waiting any number of days to be paid on accounts receivable. Factoring allows clients to take on the occasional large jobs without creating cash flow problems.
Why would a company factor?
Factoring is used for growth spurts when an infusion of working capital is needed. Factoring is used by start-up companies. Start-ups move ahead at their own pace of sales without debt usually for a year or two. If the IRS has a lien on your accounts receivables, the IRS will subordinate the UCC to a factor so the receivable can be cashed in immediately. Banks will also subordinate to a factor on the company’s accounts receivable for numerous reasons.
How can factoring help a company that does business internationally?
Companies are more competitive in the foreign marketplace if they allow time for their customers to pay. Factoring can be extended to most countries as long as there are not sanctions and political unrest.
Why do CPAs like factoring?
Accounts receivable funding (factoring) is not debt on your balance sheet and reduces the need for working capital. Factoring improves your balance sheet and increases your net worth and equity position. It is also a business expense. Factoring could reduce your taxes. Check with your CPA. Fortune 500 companies have used factoring for this reason.
How does factoring work?
Factoring does not depend upon your company’s credit; it depends upon the credit of your customers, though the factor will want to get a feel for your business. The factor will run a D& B credit report on your chosen customer or customers to decide if they are credit-worthy, and then send you the proposal; you can get started factoring in a matter of 1 to 2 weeks of application. Once you are started, you will be getting the money from your invoices in approximately 48 hours.
What are the drawbacks? Does it cost more than traditional lending?
It comes down to the financial situation the company is in, how they think about debt, and the speed with which they need money. Factoring is not debt on your balance sheet. You pay a bit more initially on short-term factoring, but you control it with invoices submitted and it is different than amortizing a loan over many years. The cost is presently 1% and a fraction for every 30 days, and sometimes close to 2%. It is a fraction of a percent for every 15-day increment thereafter. Companies selling just one large invoice will have a higher fee as well as companies selling medical insurance accounts receivable more like 2-3% for 30 days. Factoring gives you instant injections of cash whenever and however you chose to use it by submitting your chosen invoices.

How do banks look at factoring?
Factoring can be a temporary solution for companies to stay bankable or become bankable. When a bank gives us a referral, we later send them back to that bank. A bank has to say “no” to money for a start-up company or “no” to more money for an existing client because of banking guidelines and underwriting. That is when factoring is the easiest and quickest way to go.
Who factors?
Staffing/ Subcontractors/Payroll/Trucking/Freight/Medical Insurance/Home Health Care/Biotech/Consumer /IT/Construction/Oil & Gas Industries/ Manufacturing/Cable& Telecommunications/Equipment/ Auto Glass/Satellite Dish installers/ Armored Service/Engineering/Supplemental education providers/Clothing &Textiles/Distributors & Suppliers/Service Providers and /Government contracts/Agriculture/Distributors/Logistics etc…Just say everyone who is B2B with pending invoices.
What is reverse factoring?
Reverse factoring is when a slow paying client has a factor (business) pay their vendors immediately with the factor’s money. The factor is paid by the prompt pay discount offered by the vendor for immediate payment. The factor gives part of the prompt pay discount back to the client in cash for their general fund. The client reimburses the factor in his usual payables cycle, changing nothing. The client has the best of both worlds as they keep their money for 40 to 60 days and still get a portion of the prompt pay discount, or even longer and forfeit any discount.

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