Many types of companies can benefit from the use of invoice factoring. As long as a company is doing business to business or business to government (federal, state, county, city) and issuing invoices for completed work, factoring is a financing possibility.  Most companies that utilize invoice factoring have a staffing element and therefore a payroll to meet. Often there is a gap between payroll and invoices being paid. This creates a cash flow issue since working capital is tied up in unpaid invoices. Factoring releases this capital.

The companies that benefit most from factoring (but are not limited to) include the following:

• Professional Services
• Architects, Engineers, Consultants
• IT Companies
• Medical – hospital, nursing home, home care
• Security Guard, Alarm and Surveillance Companies
• Staffing – administrative, accounting, temporary, etc.
• Janitorial – including general maintenance, carpet cleaning, construction, office maintenance, and pest control
• Court Reporting Agencies
• Translation Companies
  Printing and Graphics Companies
• Manufacturers
• Distributors and Supplier
• Garment and Textile
• Import and Export Companies
• Transportation, Freight
• Contractors and Suppliers

Their margins are such that using invoice factoring is an excellent way for them to fund profitable growth.

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In factoring, the credit decision is focused on the accounts receivable of a company because it is the collateral in the transaction. Factoring is governed by the Uniform Commercial Code (UCC), which are the laws that have to do with business transactions.  This includes debts owed by one business party to another. All 50 states, Washington D.C., and most provinces in Canada have adopted the UCC.

A key aspect of factoring is the Notice of Assignment. This is a letter issued by the factoring company to their client’s customer (the debtor of the invoices). The specifics of this letter are dictated by the Uniform Commercial Code. It instructs the debtor to remit payment to the factoring company for payment of all invoices that the client issues. When a debtor company has received a Notice of Assignment they are obligated by the UCC law to pay the factor all invoices issued by their client until they have been notified by the factor that the funding relationship has ended.

Payment directly to their client instead of the factor does not remove the obligation under the UCC law to pay the factor. Most factors send the Notice of Assignment to a senior person in the general finance or accounts payable department of their client’s customer and will work with them to set up correct remittance information.  In addition to providing access to capital for businesses, factors do a quality or verification of invoices to make sure that the product or service has been delivered acceptably and will be paid as per the contract. This is done very unobtrusively usually by email, online, or even verbally.

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Not every factoring solution is the right fit for every company.  Say for instance you’re a landscaper and most of your work takes place in the summer time.  Would you want to sign an agreement that impacts your business year round?  What if you have a staffing company with consistent monthly invoice amounts and you want a more competitive rate?   Below we have explain the main differences between selective and comprehensive invoice factoring and how each can help in these situations mentioned.

Selective Invoice Factoring

With this you can choose which accounts to factor and which invoices from the chosen accounts to factor. There typically  is no minimum dollar amount required and no required time frame to factor. This type of factoring works well if your business is seasonal, have short term needs for funding or if you win periodic contracts that require cash flow.   In this case you may not want to make commitments because you need varying amounts of money each month and even have months when you do not need funding. Also, many firms are not comfortable turning over their entire back-office to a factoring firm as is required by comprehensive invoice factoring.  The factoring rates are slightly higher than if you make time and dollar commitments but the flexibility is much greater.

Comprehensive Invoice Factoring

With this type of invoice factoring you commit all the invoices for all customers.  You are required to commit to minimum monthly amounts to be factored and are required to commit to a contract for a set time frame, usually a year. In return you will receive lower factoring charges per the value of invoices factored. This type of invoice factoring works best if you have won a large extended contract or if you have an established set of customers with a predictable amount of business over a period of time.

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Why Factor?

Your company has come a long way since its inception. The concern for working capital was never an issue, but recently the rapid growth or seasonal changes are beginning to catch up. Owning a successful business has brought on a whole new list of concerns when it comes to cash flow.

Here are some of the reasons businesses use factoring:

• “My staff needs to be paid in 2 weeks but I get paid in 30 days.”
• “Our expenses and income have increased, but now we’re paid in 60 days.”
• “The bank is not interested in my company, they said I was too new and too small.”
• “My personal credit isn’t great but our customers always pay.”
• “I don’t have the time to find investors or sell equity in my company.”

Who Factors?

We’ve seen companies in almost every industry and of every size that use factoring. Companies that are new, have credit issues, or have varying month to month cash flow needs can easily find a factor that suits their needs.

Here’s a list of some of the types of companies we’ve worked with:

• Security Guard Services
• IT Staffing
• Pest Remediation
• Janitorial and Grounds Maintenance
• Administrative Staffing
• Long Haul Transportation

These are just a few of the diverse list of companies we’ve worked with. For more general information about the industries we service, check out our Industries Served page.

When Did Factoring Start?

Factoring has a long history dating back to 1800 BC in Babylon.  Clay tablets created during the rule of  King Hammurabi show transactions between two parties indication a future transaction of goods.  These agreements also contained the future payments of goods and were used by the “bankers” of the time as proof that would allow an advance of cash.  This system would lay the foundation to later be used by many European civilizations and would later be used by early American colonists, who would ship goods back to Europe and would use a factor to advance payment while the return ships brought payment.  Over the past couple decades, banks have had a factoring stronghold only catering to large business and corporations.  With the increased need for financing for small businesses, more and more small business factors have come in the fill those gaps.

Factoring has a long history that has benefited numerous businesses, large and small.  It has become a widespread financial tool used by a large range of businesses, ranging from small hundred dollar transactions to hundreds of millions with a factoring company available for any size.

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Factoring may seem confusing for those that haven’t tried it before.  When do I let my customer know? Do funds go straight to my account?  When do the advances happen?    We’ve listed everything out step by step below to help you better understand factoring.

Application & Approval: After a brief qualification period that generally takes about a week, the funding process can begin.

Notification: Prior to the initial funding a letter is sent to your customer alerting your customers that you have enlisted the services of an invoice factoring company, that payments for your invoices have been assigned to this company and that your invoice payments are to be sent to them.

Product Delivered or Service Performed: Your company provides a service or product to your customer.

Invoice Generated: Invoice(s) are created and sent to your customer and copies of these are sent to the factoring company.

Invoice Verification: A representative from  the factoring company verifies that your customer satisfactorily received your product or service and will pay the invoice according to terms.   There are many ways that this can be accomplished professionally.

Funds Advanced to Your Bank Account: Upon verification, funds are wired to your bank account typically the same day that the invoices are verified.

Invoice is Paid by Customer to the Factoring Company: When the invoice is paid by your customer, the remaining balance is wired to your bank account less the factoring fee for purchasing the invoice.

 -OR-

Invoice is Not Paid by Customer: In a case where the invoice is not paid for whatever reason within a reasonable period of time, your company can buy back the invoice from the funder or exchange it for a current one.

Process Repeats: The process begins again when next invoice is issued.

There you have it, invoice factoring explained step by step.  Feel free to contact us here if you have questions or would like to know more.

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