What Is a Factor?

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A factor is an intermediary agent that provides cash or financing to companies by purchasing their accounts receivables in short, a factor is a funding source; the factor agrees to pay the company the value of an invoice—less a discount for commission and fees.

Factoring can help companies improve their short-term cash needs by selling their receivables in return for an injection of cash from the factoring company. The practice is also known as factoring, factoring finance, and accounts receivables financing. 

 

Understanding a Factor

 

Factoring allows a business to obtain immediate capital in the amount of the anticipated future income due from all outstanding invoices. These invoices are captured in accounts receivable, an asset account on a company's balance sheet, which represents money owed to the company from customers for sales made on credit. For accounting purposes, receivables are recorded on the balance sheet as current assets since the money is usually collected in less than one year.

 

 

A company can experience cash flow shortfalls when its short-term debts (or bills) exceed the revenue being generated from sales. If a company has a significant portion of its sales done via accounts receivables, the money collected from the receivables might not be paid in time for the company to meet its short-term accounts payable. As a result, companies can opt to sell their receivables to a factor and receive cash.

There are three parties directly involved in a transaction involving a factor: The first party is the company selling its accounts receivables. The second party is the factor that purchases the receivables. Finally, the third party is the company's customer, who must now pay the receivable amount to the factor (rather than paying the company that was originally owed the money).

 

Requirements for a Factor

 

Although the terms and conditions set by a factor can vary depending on its internal practices, the funds are often released to the seller of the receivables within 24 hours. In return for paying the company cash for its accounts receivables, the factor earns a fee.

 

 

The company selling the receivables transfers the risk of default by its customers to the factor. As a result, the factor must charge a fee to help compensate for that risk. Typically, a percentage of the receivable amount is kept by the factor; however, that percentage can vary, depending on the creditworthiness of the customers paying the receivables.

If the financial company acting as the factor believes there's an increased risk of incurring a loss—due to the customers not being able to pay the receivable amounts—they'll charge a higher fee to the company selling the receivables. If there's a low risk from collecting the receivables, the factoring fee charged to the company will be lower.

 

The duration of time the receivables have been outstanding or uncollected can impact the factoring fee, too. Some financial institutions that provide factoring may have additional terms and conditions. For example, a factor may want the company to pay additional money in the event one of the company's customers defaults on a receivable.

There are three parties directly involved:

 

the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice. The receivable, usually associated with an invoice for work performed or goods sold, is essentially a financial asset that gives the owner of the receivable the legal right to collect money from the debtor whose financial liability directly corresponds to the receivable asset. The seller sells the receivables at a discount to the third party, the specialized financial organization (aka the factor) to obtain cash. This process is sometimes used in manufacturing industries when the immediate need for raw material outstrips their available cash and ability to purchase "on account". Both invoice discounting and factoring are used by B2B companies to ensure they have the immediate cash flow necessary to meet their current and immediate obligations. Invoice factoring is not a relevant financing option for retail or B2C companies because they generally do not have business or commercial clients, a necessary condition for factoring.

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The sale of the receivable transfers ownership of the receivable to the factor, indicating the factor obtains all of the rights associated with the receivables. Accordingly, the receivable becomes the factor's asset, and the factor obtains the right to receive the payments made by the debtor for the invoice amount and is free to pledge or exchange the receivable asset without unreasonable constraints or restrictions. Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. The arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. If the factoring transfers the receivable "without recourse", the factor (purchaser of the receivable) must bear the loss if the account debtor does not pay the invoice amount. If the factoring transfers the receivable "with recourse", the factor has the right to collect the unpaid invoice amount from the transferor (seller).However, any merchandise returns that may diminish the invoice amount that is collectible from the accounts receivable are typically the responsibility of the seller, and the factor will typically hold back paying the seller for a portion of the receivable being sold (the "factor's holdback receivable") in order to cover the merchandise returns associated with the factored receivables until the privilege to return the merchandise expires.

 

What is the Factoring Process?

 

The factoring process is very straightforward. Acting under a simple agreement a business sells its accounts receivable to a finance company by Michael Woo (a “Factor”) in return for an immediate cash advance-usually 80-90% of the invoice amount. Invoice discounting is typically conducted under what is called. full notification. Meaning, the account debtor is made aware that the invoice has been sold and is directed to make payment directly to the finance company. The Factor then follows for payment of the receivable, deducts its fees from the proceeds, and remits the balance to the business. Invoice discounting is the selling of accounts receivable to a third party to improve cash flow

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 STEP 1 – INVOICES INTO CASH:

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You have Open B2B or B2G Invoices and need cash now.

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 STEP 2 – VERIFICATION:

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The factor verifies your customers are creditworthy and love your product and services.

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 STEP 3 – SAME DAY CASH:

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The same day the factoring company will wire you 80-90% of all your open Invoices.

 

 STEP 4 – BALANCE RECEIVED:

 

 In 30-60 days, your customer pays the lockbox, and you get the balance less the factor’s minimal fees.

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 STEP 5 – REPEAT:

 

Repeat when you have new invoices for continued, unlimited working capital! Is Factoring Considered Debt?

 

 Factoring is not debt.

 

When the account receivable is sold for cash, it is just that – a sale. For this reason, small businesses are often free to enter into factoring arrangements with a finance company even if they already have a relationship in place with a bank. Also, given the simplicity of the transaction, factoring arrangements are typically consummated quickly— often within a few days. What is Non-Recourse Factoring vs. Recourse? With Non-Recourse Factoring, the factoring company gives you a credit guarantee that they are responsible for the collection of your invoices. It might be all your invoices or just those from specific clients. Typically, this guarantee is in case your client files for bankruptcy. It is critical to 2 understand that it is not a guarantee that you are protected for good or services that your client disputes for not meeting specifications. You are also not protected if your clients pay slower than usual. However, this “insurance policy” against bankruptcy is critical for your survival. Toys R Us, Vitamin World, Gymboree, Payless ShoeSource, Gander Mountain could be your ‘risk-free’ client, yet these are examples of thriving companies that filed bankruptcy. In Recourse Factoring, if your client does not pay the invoice by a specific date, the factoring company can charge that invoice back to you, or you can replace that invoice with another good invoice., In some ways, this is similar to a line of credit from a bank with a borrowing base as one of the loan requirements. If an invoice becomes unpaid, for example, longer than 90 days a bank won’t let you borrow against it, or a factor will ask you to replace either the advanced funds or give them another good unfunded invoice.

 

​Apply now and get funded within 24 hours of approval.

 

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SIMPLY REQUEST

 

A FACTORING/

 

ACCOUNT

 

RECEIVABLES

 

APPLICATION

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