What is Factoring?

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What is Factoring?

Venture Factoring
"A Bridge to Venture Capital"

Question: What do these companies have in common: A Fortune 500 software manufacturer, a venture-backed telco, and a boot-strapped start-up?

Answer:

THEY HAVE ALL ACCESSED VITAL FUNDING THROUGH RECEIVABLES FINANCING. Clearly, companies that are this diverse approach funding for different reasons and in different ways. But firms of every size and description have found that receivables financing—commonly termed “factoring”--can prove vital in achieving individual business goals.

Factoring is essentially the sale or financing of invoices. Most invoices have extended terms --30, 45 or 60 days. A company can either wait for its customer to pay, offer a discount to get the customer to pay early, or finance the invoice. Each option has a cost. By waiting for the customer to pay, particularly if cash is tight, there is an opportunity cost; a company loses the use of these funds during that period. By offering a discount—perhaps two percent for payment in 10 days--you run the risk of having the customer take the discount, while still waiting 30 to 60 days to pay the invoice. By financing the invoice, there is also a cost--a factoring fee--but you are in control. You can decide what invoices to finance, and when. You are not reliant upon your customer’s payment in order to meet your own obligations, or better yet, take advantage of sudden opportunities in the marketplace. This may prove vital for a company contemplating R&D and marketing efforts in advance of a new product launch.

Mechanics of Factoring:

First, the factor (lender) determines if your business fits its profile. The factor then analyzes your receivables, checking the credit of your customers and the validity of the invoice. Once verified, the factor advances 70 percent to 80 percent of the face amount of the invoice. When your customer pays, which is usually to the factor’s lock-box, a factoring fee is deducted from the payment. The fee usually ranges from one percent to four percent of the invoice amount, depending on when the customer pays. If the invoice is disputed by your customer, the invoice must be replaced or repaid.