Frequently Asked Questions about Factoring Accounts Receivables

I decided to write my next blog on this topic since these same questions kept being asked during several of my presentations on factoring of accounts receivables.

*  How long does the process take in getting signed up?  The average would be 5 days from submitting the application to signing the final documents.  Sometimes, it can be less days or sometimes longer, depending on the situation.

*  Do I need to factor all of my receivables?  You need to check with the factor.  Most will allow you to decide on which invoices you want to factor and when you want to factor them.

*  How large does the invoice need to be?  Factors will vary but the majority will accept single invoices as small as $100.

*  What is the fee for factoring?  Every factor is different with their pricing structures.  The average would be 1.5% – 3% on the face amount of the invoice per 30 days that the invoice is outstanding.  Some factors offer daily, 5 and 10 day rates besides the 30 days. The fee is based on the industry, credit quality of your customers, the volume you plan on factoring and the advance rate.

*  Are there any additional fees for factoring?  It is very important that you ask since there are some factors that do not disclose this upfront nor are very clear in their proposals and/or contracts.  Some will charge an application fee, closing costs, due diligent fees, credit check fees, processing fees, wire or ACH deposit fees, volume requirement fees and early termination fees in addition to the factor fee.  Be wary of those factors that offer a very low factor fee because usually they will have all of those other fees that will end up costing you more.  Also, if any factors are asking for any upfront monies.  Any fees should be deducted from the 1st funding.  I recommend working with factors that only charge a due diligent fee deducted from your 1st funding.  Other fees that are common would be a wire or ACH deposit fee.

*  What if I have a bank loan or line of credit, will I be able to factor my receivables?  You need to check the security agreement in your loan documents that you signed.  Most banks will take a lien on all of your business assets which includes “all accounts” or will state the accounts receivable. Most factors need to be in 1st position on your receivables.  If this is the case, you have a few options.  Talk to your bank contact to see if they can subordinate their position on the receivables.  They might agree to this if you have enough other collateral securing the loan or line of credit.  If they cannot do this, then you might be able to list a few of your accounts that you need to factor and the bank will subordinate their position on those accounts, remaining in 1st position on the others.  If they refuse to do this, then your only other option is to replace the receivables with other collateral that you might have or to pay the loan or line of credit off.  Sometimes the factor can work with the bank to set up a payment plan in getting the loan paid off while factoring your receivables.

*  Can I be approved even though I am a start-up, have bad credit, low FICO score or experienced some business losses the prior years?  Yes.  Most factors put emphasis on the credit quality of your customers and their ability to pay, not yours.

*  If my customers don’t pay the invoice what happens?  Most factors are “recourse lenders”.  This means that if your customer doesn’t pay the invoice, then after 90-120 days, the factor can charge back the invoice to you.  Sometimes they will deduct this from any monies held back in your reserves or will allow you to replace the invoice with another one.  If you are with a factor that is a “non-recourse lender”, then if your customer doesn’t pay the invoice within those 90 days because they declared insolvency, then the factor will absorb the loss and not charge back the invoice to you.  Most people believe that if they are with a non-recourse lender, if their customer doesn’t pay the invoice for whatever reason, they will be protected against this loss because the factoring company will absorb it.  This is a wrong assumption. Read more about this in my blog dated March 22, 2012.  If you are with a non-recourse lender, make sure you review the documents so that you fully understand what it will cover.

* Will my customers know that I am factoring?  All factors need to verify the invoices.  Some will do verbal verification and others require written.  You need to ask the factor upfront what their verification process is so that you can communicate this to your customer before you start to factor their invoices.  I suggest telling your customers” you have partnered with ABC Company and you will be outsourcing your accounts receivable.  ABC Company will be contacting them to verify the invoices by …….(explain what the process will be).”  This way it should be a smooth transition once you start factoring those invoices.  Factoring is now very common and most companies are accustomed to working with factors.

*  If I am signed up for factoring and want to terminate it, can I and will I have to pay any fees?  This is very important for you to ask upfront and review your contracts.  I have met with some businesses that were with a current factor paying very high fees and they could not terminate it at that time because their contract with the factor stated a volume requirement and a contract term. The fees for not reaching the volume requirement and/or the early termination fees were too high to pay upfront. Or they might qualify for bank financing and cannot leave or are just not happy with the factor.  There are factors out there that do not have any volume requirements or contract terms and those are who I would highly recommend you using.  If you have to work with a factor requiring the volume and contract term, make sure you are at a volume that you know for sure you will meet.  Keep in mind that some of your clients might not get approved for factoring and the factor will still want you to meet that volume amount.

*  What are the benefits of factoring?  It allows your company to focus on growth, hire more employees, meet payroll needs, get current with payroll taxes, purchase new equipment, seize new business opportunities, order inventory and receive payment discounts from vendors, just to name a few.  It also has the advantages of creating no balance sheet debt, it is fast and simple, doesn’t require long applications or business plans, it is available when you need it, it has no limits – the financing grows as the volume grows, it does not intrude in your business, it improves the service’s balance sheet by increasing liquidity, it is accounted as a discount from revenue not as an expense and it is contingent upon the payor’s credit worthiness not the provider.

At Alternative Funding Options (AFO), we work with companies in helping them find the best funding source for factoring on accounts receivable along with purchase order financing, inventory, asset based lending, equipment leasing, Visa/MasterCard merchant advances and commercial real estate lending.  And we do not charge a fee!