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Factoring 101
Factoring (more properly known as accounts receivable factoring), is a method of financing terms of payment.  Typically those doing business B2B, (business with other businesses and not retail) will invoice for their sales and usually grant customers 30 days or longer to pay.  Granting such terms of payment is a useful tool in attracting new customers. Unfortunately it comes at a price.  By granting terms of payment, a business is actually providing credit to its customers.  If those customers take 30, 45, 60 days or longer to then make payments, it can cause the grantor to have its own problems accessing enough cash to make weekly payroll and pay suppliers on time. 

The solution to such problems is factoring.  Factors are specialized finance companies that purchase the accounts receivable of a company as soon as they are created.  Instead of the seller waiting to get paid, the factor now waits.  The factor performs this "waiting" service for a fee called the "factoring fee".   For new brokers, it is important to make note of several things.

First:  Factors are not lenders like a bank.  They buy the accounts receivable of the selling business and take ownership of them.

Second:   Factors only purchase invoices.  The do not finance real estate notes or any other type of obligation.  They do not provide loans to buy a business.  If the transaction does not involve an invoice, do not call a factor!
See Deal Breakers

The Initial Advance
In a typical factoring arrangement (actually called a factoring facility), a business known as the "client" will submit invoices to its factor every week to be purchase.  The factor will review the invoices and perform credit analysis if necessary and then create a "schedule of accounts" it will purchase.  The cash given to the seller at the time of purchase is know as the "initial advance" and is typically 80% of the face value of the invoices.  If, for example, $20,000 in invoices were submitted to the factor, the initial advance would be about $16,000.  This advance is wired directly into the business bank account of the seller within hours of the factor's purchase.

The Collection Process
During the course of the next 30-60 days, the customers of the client will pay the invoices and due to the factor's notification to do so, will make the checks payable directly to the factor at the factor's address.  As each invoice is paid, the factor reimburses itself for the initial advance of 80% and sets the remaining 20% aside to be rebated to the client.  Such rebates, usually called reserve distributions, are typically made every one or two weeks for all the invoices collected and whose checks have cleared the factor's bank.  The funds are again wired directly into the client's business bank account.  Prior to wiring such rebates, however, the factor's fee will be deducted.  
 

 The Factor's Fee
Though factoring fees vary from factor to factor, most typically they are charged in "windows" or short increments of time the most common of which is 10 days.  A factoring fee of .9% for 10 days results in a 2.7% fee for the month. The longer the invoice remains outstanding, the higher the fee.

Some factors will charge a "flat fee" plus interest.  Here, the factor's rate is a fixed amount whether the invoice is outstanding for 1 day or 90.  The factor will additionally charge interest, however, on the "funds employed" or the amount provided to the client in the advance.

In today's markets, factoring fees are typically in the 2.5%-3% for 30 days. This means that factoring invoices for customers that pay in 30 days is really no more expensive than if that custom gave the client a VISA or MasterCard.  It is considerably less expensive than AMEX. 

The Broker's Commission
To brokers, factoring is known as "the jewel" of the commercial finance industry.  This is because of its exceptional method of compensating brokers for their referrals.  Consider a typical small print shop that factors $100,000 in invoices each month.  At a .9% for 10 day factoring fee rate, the fees will total roughly $2,700 per month or 2.7%.  The broker of record will be compensated for his/her referral by receiving 10%-15% of the fees earned or in other words, $270-$405. 

Building Books of Residual Business
What truly makes the brokering of factoring so lucrative as a business is that such commission payments are "residual" in nature.  That means they are paid month after month, year after year, for as long as the client / factor relationship exists.  Productive brokers can, therefore, build books of business over time that will produce an exceptional income that can be depended upon.  Typically, once a broker has referred enough clients to factors to where $3,000,000 in receivables are being factored each month, that broker will be enjoying a healthy 6-figure income.

Case Studies
One of the easiest ways to better understand factoring is by reading several examples of its problem-solving capabilities in Case Studies.

Important Considerations for New Brokers
The industry you are becoming acquainted with offers many a "Golden Opportunity".  No particular college regimen can prepare you for this career yet six-figure income potential awaits you (so long as you have the work ethic and tenacity) in one of the worst economies on record. 

Commercial Finance Consulting and providing access to alternative funding products and solutions to small business owners is an exceptional vocation offering you the ability to earn a great living while helping others grow their dreams.  It is, however, a "knowledge-based" vocation where you must gather sufficient product knowledge to be successful.  The better you understand factoring and alternative commercial finance products, the better your reputation will become in the community and the more referrals will come your way. Product knowledge will also make marketing much, much easier due to your ability to generate leads as a result of networking.