What is factoring?
Factoring is a critical component of the financing cycle that helps companies solve their cash flow problems by providing cash advances against outstanding receivables. It allows companies to unleash the value trapped in uncollected receivables, giving business owners access to cash before the 30, 60 or 90 days that it may take for their customers to pay their bills.
Is factoring like a bank loan?
Factoring – also called accounts receivable financing – is not a loan; it’s a cash advance against the collection of a company’s outstanding receivables. Banks make loans to companies that can satisfy numerous criteria including a track record of acceptable performance, and collateral or other guarantees that can secure the loan. And the loan approval process is slow and deliberate. In accounts receivable financing, the factor is mainly concerned with whether it will be able to collect on the client’s outstanding receivables. Factoring decisions do not require extensive loan covenants or performance ratios, and decisions are usually made more rapidly. Bibby Financial Services, for instance, recently instituted a fast-track advance, called KickStart, that can turn around requests in 24 to 48 hours for amounts of $250,000 or less.
How does factoring work?
Factoring companies are concerned with the creditworthiness of their client’s customers rather than the client’s bottom line. After evaluating the creditworthiness of its client’s customers, the “factor” provides cash to its client that is equivalent to about 80 percent of the total amount of the client’s outstanding receivables. The factor then is responsible for collecting these invoices. After those collections are completed, the remaining 20 percent of the reserve, minus 1-to-2 percent for administrative fees, is returned to the client.
When do companies use factoring?
Companies turn to factoring when they need cash now to operate their businesses as they wait for their customers to pay their invoices. It’s a particularly important and useful financing strategy used by a variety of companies, including: family-owned businesses, companies that need cash to support rapid growth, firms that have seasonal peaks and valleys in their business cycles, companies that might be undergoing a restructuring, and new start-up companies. Factoring, which originated in the United Kingdom during the 1600’s is often favored by companies that like its responsiveness and flexibility.
Is factoring preferred by certain industries?
Certain industries do have a natural affinity for factoring. For instance, temporary staffing agencies like factoring because it fills gaps in their cash cycles. Employment agencies must pay their employees and their tax obligations weeks before their clients pay them back in the standard 30-day invoice cycle. Apparel, trucking and transportation are all financed by factors. But companies from all industries use factoring when they need cash to fuel growth, survive business bumps and other situations.
How does Bibby Financial Services evaluate its clients?
Bibby Financial Services prides itself on building close personal relationships with its clients to help them achieve their potential. When it begins working with a client, Bibby Financial Services uses its database of more than 10,000 customers to evaluate the credit rating of its client’s customers – the businesses that owe it money – to determine the success it will have with collections. From there, its professionally trained staff establishes a system for collections, including issuing statements, verifications and collection calls.
Is factoring always the best financing option for a company?
Factoring has proven to be an excellent financing option for companies in quick growth mode, those that do not yet qualify for a bank line of credit, companies that need flexibility in their financing due to a specific business cycle, companies that need immediate cash, as well as other situations. Some companies use the services of a factor for 12 or 18 months and then, as business evens out, they may seek a bank line of credit. But some companies prefer to stick with the flexibility and quick response that a factor can provide.
Is factoring more or less expensive than other financing options?
Factoring is used by companies to meet an immediate need so that a business opportunity doesn’t get wasted. You can measure the cost of factoring by asking these questions: Do I pay more to have cash now and fill an urgent business situation that ultimately will bring more money to my company? Or, do I take a pass because I don’t want to pay the fee, losing that business opportunity in the process?
Do factoring companies offer other services?
Some factors are skilled at working with overseas customers, using export finance or purchase order finance. Because of Bibby Financial Services’ worldwide network, it can work across borders in native languages, with extensive knowledge of local customers and regulations to help its clients meet their business needs. In export finance, funds are advanced against outstanding export invoices, an especially important consideration for U.S.-based companies since overseas clients operate on payout periods that exceed 30 days. Purchase order financing – in which funds are advanced against confirmed orders or one-off sales – can be extremely important to those businesses that may need to pay suppliers cash on delivery. There are three ways to handle these situations: Direct payment to the supplier, issuance of a letter of credit, or a supplier guarantee. Bibby Financial Services can provide all of these services to its clients.
