Factoring Receivables is an
Alternative Form of Business Financing
2-5-2005
With the ongoing
consolidation of the banking industry, financing options previously
available to small businesses are becoming fewer. The few remaining
independent banks and large banking chains have credit standards that
are often to restrictive for small businesses.
As a result of an increased amount of bad loans, and
regulatory pressure to avoid high-risk loans, fewer banks exist today
that are able and willing to provide accounts receivable financing to
small and medium size businesses. The commercial bank’s inability to
provide this type of loan has created a need for an alternative form of
finance know as “factoring”. Invoice factoring is one of the oldest
forms of working capital financing that, until recently, was unavailable
for small to mid size businesses.
A factoring company differs from a banker in many
respects. A banker extends credit based on the financial condition and
cash flow of the borrower. The borrower is expected to make monthly or
quarterly payments to the bank on good times and bad. Therefore, the
borrower must meet rigorous financial requirements and have a long,
successful track record before obtaining a bank loan.
Factoring companies do not require the client to have a
strong balance sheet or demonstrate years of profitability.
Factoring
companies in general are more interested in the credit worthiness and
financial strength of the client’s customers. If the client’s customers
are strong, the factor is usually able to provide financing by factoring
(purchasing) the client’s accounts receivable.
A factor recognizes an invoice as an immediate asset
for purchasing so long as the service (or products delivered) has been
provided and accepted by the customer. The invoice is verified and then
the advance is funded, typically 75% to 95% of the invoice value. This
is usually completed the same day that the invoices are received.
The balance of the advance is called the "Reserve". The
reserve is held back until the customer pays the invoice in full and the
invoice transaction settles. The fee is deducted from the reserve and
the balance is available for withdraw.
For example, your company factors
an invoice for $1,000 and you get a 90% ($900.00) advance, 10% ($100.00)
is held in reserve. When the invoice is paid the transaction settles
with a 3% ($30.00) fee and the balance 7% ($70.00) is placed in your
withdraw account. In this example the total fee was $30.00 for factoring
a $1000.00 invoice.
Factors often work in conjunction with banks.
Occasionally a bank customer may have a sudden need for working capital
that exceeds the bank line of credit. The factor, in such instance may
negotiate an agreement with the banker which will allow the factor to
finance a specific invoice account while the bank holds the rest of its
borrower’s accounts receivables collateral.
In summary,
factoring receivables is an alternative
form of finance widely used by small businesses. It is a very flexible
financing mechanism which can assists all kinds of businesses in meeting
payroll, taking trade discounts with suppliers, or simply increasing
liquidity to sustain growth.
US and Canada Tel 1 800 450 9653 United Kingdom Tel 0 800 404 9669
1st Commercial
Credit, a
nationwide
factoring company headquartered in El Paso, Texas. Provides accounts
receivable financing in the US, Canada, and the UK; offers
export trade finance to clients in every major world
market and can convert receivable finance transactions in 17
currencies.
1st Commercial Credit (SM) is a trademark of 1st Commercial Credit, LLC.
1st Commercial Credit is a
factoring company that provides receivable financing for all major industries, We are
always adding industries to our portfolio.
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