Factoring is the sale and purchase of accounts receivable at a discount. It is an effective way of managing working capital, while meeting the credit needs of customers.
You set up an account with a Factor to sell invoices for goods or services sold and delivered (or medical aid claims for medical service given) and you’ll receive immediate cash advance rather than wait on your customer (or funder) to pay. When your customer (of funder) makes a payment, they’ll send it to the factor.
Yes. However, you must change the payment details to Factor’s for invoices or claims factored.
Your customer will be sent an official but friendly notice of where to send the payment. If you have set up your invoices for automatic factoring, for a particular account, your invoices may have the factor’s payment details.
No, only the customers whose invoices you factor will be contacted.
No, you can pick and choose which customer’s invoice to factor. However, acceptance of customers for factoring shall be at the Factor’s discretion and shall be guided by the factoring agreement.
No, but the more the better because higher and more regular volume can translate to lower fees.
There are many factors such as customer, industry, volume, payment terms etc. that may influence the rates but it is generally between 1% and 5% per thirty days.
If you factor customers with an excellent credit rating, advances are as high as the invoice less fees only, which is up to 98%. With lower credit rated customers an advance may be between 70% and 90% of the face value of eligible invoices and are established at the time an account is opened. Established advances will for the most part depend on risk factors such as the customer, industry, terms of sales and delivery, volume, lien priority, time outstanding, client relations, experience etc.
The time and frequency of advances often depends on when and how frequently you submit invoices for funding, whether it is early or late, daily, weekly, bi-weekly or monthly. Advances are by paid bank transfer.
In the instance lower credit rated customers, all balances less applicable fees will be rebated to you as soon as the customer makes payment to the Factor.
A contract is required in order to allow the Factor to underwrite your funding and extend more favourable rates and terms to you. However, the contract does not obligate you to sell any of your invoices mandatorily. You still factor as and when your cash flow requires.
You qualify if you are a legally registered business selling goods or services on terms to other credit-worthy and reputable businesses, and you have full and unencumbered rights to receive payments.
One of the unique benefits of factoring is that eligibility is largely based on the credit-worthiness of your customers –the individual or organization who will be paying for the goods or services sold. There’s very little if any consideration at all on your credit. You may be eligible to factor even if you have some credit issues, on-going bankruptcy, loans, or other lines of credit.
Yes, the majority of factoring clients are small businesses and start-ups.
It may take anywhere from 1 to 10 days to set up an account depending on your turnaround time to fill out the application and submit the required supporting documents. A typical account can be set up in as little as 2 days all things equal, and funding within 24 to 48 hours from then on.
To get started, you submit an application along with some basic support documents. If approved, final documents will be completed for funding.
Some Factors charge an application fee. However, there are no application fees if you choose to factor with Capital Factor.
The typical initial documents required to open an account are: Proof of business registration and list of Directors, photo identification of principals/directors and/signatories. An indicative list of the customers you wish to factor is usually requested by the Factor. Before factoring any customer for the first time, you will be asked to submit the invoices and copy of accounts receivable aging for the customer.
Once you start factoring, Factor will be responsible for and will do all collections on funded invoices unless exceptions are made.
What happens if a customer does not pay will depend on how your account is set up. An account may be set up in one of two ways -recourse or non-recourse.
A recourse account requires a guarantee that you will pay back the paid amount to the Factor plus fees or set-off against your reserve funds.
With a non-recourse account, the loss will be absorbed by the Factor.
To stop factoring you should send notice of termination as per your agreement. After all accounts are paid in full and all obligations under the terms and conditions of agreement has been satisfied, your remaining reserves and future receipts will be paid to you, and a general release will be completed.
No, Accounts Receivable Factoring is very distinct from Debt Collection. In the first instance it is a necessary precondition that the factored customer is a good and performing customer. The only reason that you choose to factor the customer is because you want to receive money faster than what you have agreed with the customer.
Factoring allows you to maintain customer’s credit terms, while also speeding up your collections.
On the other hand, Debt Collection is handing over non-performing accounts for collection by a third party, which is not what factoring is about.
Common MISCONCEPTIONS about Factoring
- It is very expensive – This is false. In fact, it is often cheaper than most settlement discounts that large companies will take from you for early payments.
- It involves unscrupulous collection tactics and you lose customers – This is also false. As your financier, the Factor has a vested interest in maintaining a good relationship with your customer and in most instances, is reliant on you to encourage payment in a friendly manner.
- It should not be used by small businesses except as a last resort to avoid liquidation – Also not true. In fact, factoring is most suited for small businesses, which may not have sufficient credit history and cash flows to support traditional bank loans.
Order Financing is a payment made to a supplier to procure or produce and deliver goods that have been ordered.
If you have an order from a customer but lack the financial resources to fulfil it, you can request and receive advance funding on the order from a Factor. A pro forma has to be issued to the buyer and accepted by the buyer before the Factor funds the order. Once accepted by the buyer, the order cannot be rejected for reasons of ‘not required’ or ‘cancelled’. The pro forma invoice must bear the payment details of the Factor. On completion or delivery of the order the buyer will pay the Factor the full invoice value. The Factor will then deduct its fees and the amount that was advanced to you and remit the balance of the reserve to you immediately.
Every transaction is unique therefore, the real cost of P.O. financing will depend on the specific and associated terms and conditions of the P.O.
On average, P.O Financing tends to be costlier than general accounts receivable factoring because there are other risks associated with the invoices such as non-delivery, quality assurance etc.
Contact our team to negotiate specific terms of your P.O. Financing requirements.
We will consider purchase order funding requests between $10,000 and $100,000. The limit may be reviewed upwards based on your delivery performance and payment performance of the customer.
We will fund 100% costs of production of goods or up to 70% value of the P.O. Invoice whichever is lower. We will not fund soft costs such as labour and overheads except in rare cases.
Qualifying for P.O Financing is as easy as:
- See that you meet the minimum criteria.
- Submit an application along with required support documents.
- The P.O. is from a legally registered and credit-worthy business and is non-cancellable.
A completed application, copy of your Purchase Order, agreement between buyer and seller (where applicable), invoice to buyer bearing the Factor’s payment details for P.O financing, suppliers’ invoice to substantiate order financing requirement, buyer’s accounts receivable aging and business financials.
A company has to have been legally registered and trading for at least 1 year to qualify for P.O. Financing. However, exceptions may be made at the Factor’s discretion. Please contact our team to discuss your specific P.O. financing requirements.
No. There is no application fee.
A P.O financing timeline will vary anywhere from 1 up to 30 days or more depending on any number of factors such as if it were the first funding, types of goods, production capacity, quantities ordered, value, funding criteria, and terms and conditions of sales and delivery etc. Average is 7 to 10 days.
Yes, provided it is for the purchase of finished goods for direct delivery to the buyer.
No. You can fund only one or as many transactions as you like. Each transaction is deemed independent of the other unless otherwise indicated.
Quite simply Purchase Order (P.O.) Funding is made before goods or services are delivered to buyer while invoice funding is done after goods or services is delivered. They’re both short-term funding except one provides funds to facilitate the production, acquisition, and delivery of pre-sold goods and the other is to provide expedited access to funds after delivery.