How Accounts Receivable
Factoring Works
You begin by
filling out a simple client profile,which we will provide you.
This profile will cover
basics such as your company's name and address, the nature of
your business, and information about your customers.
You may need
to supply an accounts
receivable aging report, existing customers'
credit limits, or other related documents.
Remember the factor will
attempt to determine the creditworthiness of your customers
independent of
their credit history with
your business. We want a broader view of
their overall credit status.
During this initial stage you will
also cover basic financial arrangements with the factor.
For instance,
what will be the monthly
volume of invoices you want to factor
(i.e. how
liquid do you need to be)?
What will the advance rate and
the discount
rate be? How quickly will
the factor issue the advance to you?
In
most cases, the answers to these
questions will vary depending on the
financial strength of your customer(s)
and the anticipated monthly
sales
volume to be factored. Variations
between industries, length of
time in operation, and general reputation of how risky a customer of
yours may be. For instance, a long list of high-risk clients will cost
you more in factoring fees than a short list of government agencies
with a slow-pay history.
In the factoring business, volume is
all important. The higher your volume(the dollar amount of invoices you factor),
the more favorable your rates will be.
The factor will use the client profile you submit to determine if your business is suitable for factoring. This process is simply the factor analyzing the risks versus the rewards, using the information you provided.
Once approved, you can expect to negotiate terms and conditions. The negotiation process takes several aspects of the deal into consideration. For instance, if you want to factor $10,000, you can't expect as good a deal as a
company that wants to factor $500,000.
During the negotiation process, you will become well aware of what it costs to factor your accounts receivable. After you reach an agreement with the factor, the funding wheels begin to roll. The factor conducts due diligence by researching your customers' credit and any liens placed against your company. The factor also confirms the legitimacy of your invoice before buying your receivables and advancing cash to you