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Order Factoring 101: A Broker's Guide

What is Accounts Receivable Factoring?

Factoring, or as it is more commonly known, accounts receivable factoring is a well-practiced method of business finance found throughout the world. It is characterized by both it's simplicity and it's ready availability to even the smallest of ventures.

Factoring addresses problems associated with cash flow and working capital shortages that accrue when a business begins to grant credit in the form of extended terms of payment to it's customers, thus generating accounts receivable.  In many cases, working capital is depleted as accounts receivable increase and in extreme cases, a small business begins to run out of cash and finds it cannot pay its current bills and often, even make payroll for employees. 

Factors solve such problems by providing "advances of payment" against the accounts receivable. Factoring Your Accounts Receivable The advances of payment allow the customers of a business to still enjoy 30-60 day terms of payment while the small business owner now gets an advance of cash immediately after shipping the goods or performing a service.  For small business owners, factoring creates a win-win situation for business owner and customer alike.

Factoring is Not a Loan

Factoring is a very powerful financial tool for small and mid-size business owners worldwide with trillions of dollars of factoring volume being provided each year domestically and cross-border.  Factors based in the U.S. provide over $100 billion dollars in financing each year for our domestic small business owner yet that figure pales when compared to many European countries, such as the United Kingdom, which generates more than double the volume of it's former colonies. 

Factoring is a unique form of business financing which is actually not a loan at all. Instead of simply lending a business owner a defined lump sum of cash with required monthly payments (as with a bank loan), factors purchase the accounts receivable (invoices) of a business immediately upon creation by that business.  Typically, an immediate advance is 80% of the invoice face amount.  The 20% balance of the invoice not advanced, is remitted to the factor's client once the payment has ultimately been received in 30-60 days.  This 20% "rebate" is modestly reduced by the factor's fee for services.

Broad Availability Since It's a Purchase and Sale Transaction

Factoring is also characterized by its broad availability.  There are many hundreds of U.S. based factoring companies and that does not include the many banks offering this powerful financial tool as well.  What makes factoring even more broadly available to business owners is that in the case of factoring and because it is a purchase and sale transaction and not a loan, factoring finance is available to even small companies with little or no credit history.  This is because, as opposed to traditional lenders who would look for loan repayment from the borrowing business owner, factors look to the customers of that same business owner for payment upon their invoices.  This makes the creditworthiness of a business owner's customers much more important to the factor than the creditworthiness of the actual business owner.

Requirements for a Factoring Relationship

For small business owners, setting up a factoring relationship is very easy and there are only a few requirements:

  1. The invoices you factor must represent "true sales" and not be conditional in any way.
  2. The goods or services represented by your invoices must already be performed or delivered.  Factors do not provide contract financing and will not purchase "pre-ship" invoices.
  3. As a business owner, your accounts receivable cannot be pledged as collateral for a current business loan.
  4. Your monthly invoice volume should be at least $25,000 although smaller businesses with high-growth expectations can usually interest a factor in taking on the account.

How to Get Your Business Started With Factoring

Getting started with factoring is very easy and typically, you can be enjoying all of the benefits the factoring industry has to offer within just a few days of applying.  Finding a factor is also relatively easy since there are well over 500 operating nationwide although many factors tend to be "niche" providers.  For example, some factors only finance trucking companies.  Others finance only staffing companies.  Others specialize in construction funding. 

One of the best methods of finding the best factor for a business in a particular industry is to use the services of a trained commercial finance consultant or "freelance factoring broker". Independent brokers are skilled professionals that match clients to factors based on their unique industries and needs.  And one of the most attractive reasons to utilize the services of an independent broker are fees...there typically aren't any for benefitting from the broker's expertise and service.  Just like a factor's in-house business development personnel, independent brokers are compensated by the factor and virtually never by the actual factoring client.

Get Started Today!

You can get started today and receive a FREE proposal through IACFB by simply completing the "Contact Us" form below.  Once received, you will be contacted by one of our courteous underwriters who will discuss your needs and requirements.