7 Questions to Ask Before Signing a Factoring Agreement

There are many different types of factoring companies. There are also many methods of factoring. Different companies operate in different ways, and as a result, you need to do your homework to be certain you are working with the right company for your business. There are a number of questions here to help get you started so that you know what to expect when you sign the contract:

1. Do you have experience in our industry?
Where as Factoring companies generally factor a variety of industries, some specialize in specific industries, such as construction factoring, and that experience, first of all, lets them understand your business right from the start. This shortens the time required for you to receive your money. Secondly, they are better able to evaluate the risks associated with collections in that industry.

2. What does your application process involve, including fees and pricing?
Find out what is required, how long it will take, and how much it will cost.  Inquire regarding additional fees and watch for them in the contract. These could be fees for due diligence, credit reporting, background search fees, and more.

3. What if the client does not pay the invoice? Who is responsible?
The answer to this is determined by whether you are doing non-recourse factoring or recourse factoring. In non-recourse factoring, the factor assumes all liability for the non-payment of the debt. Recourse factoring, which is generally less expensive, requires the client to be responsible for non-payment.  This is usually a rare occurrence when working with a factoring company that has a good understanding of credit.

4. What type of support systems do you offer your clients?
Great factoring companies offer credit and collection functions as well as their products. Full service factoring companies provide back office accounting functions, making your accounts receivable a variable, rather than a fixed cost. The factor will collect the debt from the customer and provide a detailed account of payments collections with real time access to your information.

5.How do you determine the advance?
The advance is equal to the value of the invoice minus the reserve, minus the discount fee. The reserve is the holdback amount that is paid to the seller once the invoice is paid. The discount fee is the cost associated with the transaction as well as expenses incurred.

6. Is there a contract term? How long does this contract last? Is it automatically self-renewing?
Asking these questions in advance will ensure that you do not get locked into a contract that does not serve your needs and that you don’t incur any unexpected costs like termination fees.

7. Do you have other companies and contact names as references that I could call?
Like any other business decision, it is worth getting a reference on service levels and reputation before you sign.

These questions will help you find the right company to suit your needs. Check into the answers to these eight questions before you sign so that you know your obligations to the factoring company and so no surprises happen once the process is underway.

The natural up-and-down flow of even the most successful businesses can mean there are times when cash is tight and other times when cash is plentiful. Even when cash is tight, there is still a need to invest in capital, personnel, and growth. You need to be ready for the next crest in the market, that, after several cycles of ebb and flow, you know is coming.

So, how do you invest in your own future when cash is tight?

Factoring is a process where you sell your invoices for cash. It can be referred to by many names including:

• invoice factoring
• asset based lending
• accounts receivable factoring
• receivables financing
• AR factoring

Know what you're getting from your factoring company

The bottom line is the factoring company you choose turns your receivables into cash, which means you can invest for the long term now.

Choosing a factoring company can be an intimidating process, but it does not have to be. The company you choose should provide the following five key qualities that allow you to single-mindedly focus on growing your business:

1. A factoring company is not a bank, but their representatives should dress and treat you as professionally as a bank would.

2. Your factoring representative should have an extensive knowledge of your industry and know the key issues within that industry as they apply to invoice factoring. They should understand the specific language of your industry and know the key issues that face your industry now. They should understand the ebb and flow of your industry and be sensitive to the timing of these cycles.

3. Your factoring representative should instill confidence in you and should know the factoring process and how it applies to your industry.  You representative should be able to communicate that to you in a way that lets you feel comfortable in sharing  the sensitive financial details of your company.

4. Your factoring company should be able to describe the process simply as the purchase of an invoice for cash. The cost of factoring is not like interest on a loan. You receive the cash value of the invoice less the discount. It is a one-time process which you can repeat as often as you need to.

5. Investigate the history of the company who will factor your invoices. Have they been around long enough to know your industry? Do they have specialists in-house who have worked in your industry? Do you know other companies who have successfully used their services?

You need to feel clear and comfortable with your factoring company because they could and should be an integral part of your long-term strategy for growth.  Vertex Financial provides factoring services and helps your business access the cash now it needs to grow in the future.  Contact us to learn more about our factoring services.

Factoring can be an extremely attractive and viable alternative to the inherent uncertainties surrounding a company’s cash flow situation without incurring any debt on your balance sheet like you would find in a traditional lending relationship.

Simply put, invoice factoring accelerates the cash collection process by placing the monies already due you back to work in your business from the day you generate an invoice without having to wait for the sometimes lengthy and unpredictable payment cycle to run its course.  As a business owner, and/or decision maker, you control the process; you decide which client(s) to factor, which invoices to factor, and when to factor.

When you decide to factor, it helps to know the terminology of factoring so the process flows smoothly and efficiently. Vertex can help facilitate this process but here are a few terms you may want to be familiar with when discussing your factoring opportunity:

• Factoring: Factoring is a financial transaction whereby a business sells its accounts receivable, for example, invoices, to a third party at a discount. The sale of the receivables essentially transfers ownership of the receivables to the factor, and includes all the rights associated with the receivable. The three parties directly involved in the factoring transaction are: the one who sells the receivable, the one who owes for the purchase of goods and the factor.

• Factor: The third party who purchases your receivables at a discount. The factor then advances your company the cash for the receivable minus a discount. They then collect the invoice amount, when due, from the customer.

• Receivable: A financial asset which records the customer’s purchase of goods and money owing for the transaction.

• Account Creditor: The account creditor is the company who provides the goods or services and generates the invoice.

• Advance: This is a percentage of the gross invoice amount that is paid to the seller by the factor when the invoice changes hands.

• Reserve: This is the remainder of the invoice price held by the factor until the payment by the account debtor (your customer) is made to the factor.

• Discount Fee: The factor charges a fee for the service of factoring the invoice. It is usually a percentage of the value of the gross invoice amount. This discount fee is deducted from the reserve, along with expenses. The remaining reserve is then paid to the client who sold the invoice.

• Gross Invoice Amount: This is the amount showing on the invoice before customer discounts and coupons. A net invoice is how much the customer actually owes for the product.

• Recourse factoring: Recourse determines who carries the risk if the client does not pay the invoice. In factoring with recourse, the seller of the invoice is required to buy back the invoice in an agreed -upon number of days if the client does not pay.

• Non-recourse factoring: The factor buys the invoice and carries all the risk for collecting that invoice.

• Reverse factoring: This is a form of factoring where the client (company making the purchase) initiates the factoring process to help his suppliers finance their receivables more easily and at a lower interest rate than what would normally be offered.

• Opportunity Cost: This is an economic term referring to the value of the foregone alternative when a choice is made between two or more alternatives. This is the cost incurred, for example, if you choose not to factor, then you lose the capital opportunities that the cash would have paid for.

Call us for a no-obligation discussion of factoring opportunities for your business.

Source: Wikipedia

As the staffing industry “squeeze” continues, there are key strategies that staffing companies can adopt to stay profitable and grow.  Following are some of the most effective strategies they can use:

• Recognize that staffing is not part of the profit equation for a company using your services. Thus it makes sense to provide your services in ways that overlap and integrate with the systems of your clients. In short, you need to make it easy for your clients to use your services. This implies making the connection between the two of your companies seamless and painless. From the first point of contact, your services should flow easily with the needs of your client. This indicates a continuation of the trend towards “consultative versus transaction based” relationships in the industry.
• Provide more than just “seats in chairs.” Staff needs to be fully trained in the services they provide. Staff should be trained in softer skills like how to participate and reach consensus through team building, appropriate office etiquette and basic computer skills. These are the qualities of staffing that affect your reputation in a positive way for growth.
• Use diversification to create a consistent flow of staffing placement.  Despite the variances in performance in the industries to whom you provide staff. IT staffing means growth and is expected to continue as a trend going forward. Not only does diversification provide an alternative to the ebb and flow of the industries you service, but it allows you to take consistent, high performing workers and generalize their placements to other industries.
• Use money to expand and diversify. As you grow and gain popularity as a staffing firm, it becomes harder to maintain cash flow and pay employees. With long payment times on your receivables, it can be challenging to stay in the game, even without expansion and growth. It is tougher for banks to lend to these newly formed staffing firms without long histories of stability.  Invoice factoring provides an alternative to banks and other forms of lending.

How Staffing Factoring Works

Factoring provides cash fast, so you can take advantage of your opportunities as they come up. Your credit history is not an issue, as accounts receivable factoring is about your customer not about you. The process is fast and efficient and you can have your cash in 24-48 hours from the time you apply.

Our Staffing Factoring allows you to:

• Enhance your service offering with better recruiting, placement and support for your staff
• Partner with your customers in ways that make sense to them
• Spend your time optimizing the business, not chasing your cash flow
• Operate lean and mean, which helps you maintain leadership in your service area
• Grow and diversify in an very competitive market

If you need invoice factoring services to help your business grow because you don’t have the access to credit that you need, contact Vertex Financial.

Recently, Debra Wilson, Vertex Financial’s President who has been in the factoring industry for over 30 years and has watched it pass through various phases and client perceptions joined the Linked Local Network on Blog Talk Radio to discuss “Factoring as a Segueway to Success”. She helped to make a foreign topic feel domestic and perhaps even enlightened one of the listeners enough to at least consider the unthinkable; factoring their assets as a choice, not as a necessity or last ditch effort. Read on for more info covered in the interview.

Opportunity is on the horizon.

What is Factoring?

Factoring is an alternative method of financing growth in your business. For companies just starting out, for companies experiencing unexpected growth, and for companies whose banks have called in their loans in this volatile economy, factoring is a way to stabilize your cash flow and provide working capital for success.

In more stable economic times, borrowers would easily qualify for loans at prime +1. But in times when lending institutions are more cautious, bank loans are difficult to acquire even for established businesses. So businesses go to alternative lenders and find rates to be out of reach. This is where factoring makes sense.

Factoring companies purchase your accounts receivable for a 70-90% advance. They actually take over the payment process on your behalf too. After the account pays the factoring company, you get the difference between the advance and the value of the receivable minus a fee.

Advantages of Factoring

First, factoring lets you hand over your accounts receivable function to the factoring company. This includes chasing late payments and bad debts. The factoring company actually qualifies your customer and helps you to collect.

Second, factoring lets you fund growth without leveraging fixed assets with potential loss of those assets in hard times. Factoring is a straight exchange of the account receivable for cash.

Third, factoring is fast and easy and does not depend on credit history. Factoring companies see their role as bringing value to every relationship. Both companies win, and neither company experiences long term challenges from the exchange.

How Does Factoring Work?

The image of the collection industry has a long history, some of it good and some of it bad. Factoring companies are all about both sides winning, and neither side suffering long term consequences. In the tough economy of 2008, volume dropped for many companies. We are now seeing it coming back – companies are poised to grow in post-recessionary times, and factoring helps them to grow.

The factoring company buys the manufacturing company receivable for cash. This turn around can occur within a couple of days. Then, the manufacturer is able to invest in raw materials or capital for production and distribution of that very order.  The factoring company sends a letter introducing themselves as the collector of the receivable. In the early days of factoring, this was seen as a red flag and manufacturers were concerned about their reputation following the letter. But these days, most businesses are well-versed in the numerous methods of financing for growth, of which factoring is the safest, quickest, and easiest method.

It is important when deciding to choose factoring, to look not at what the cost is, but what it can buy you. Satisfied customers, growth, stability, and long term success are the benefits you can expect to receive when you work with a factoring company!