What is factoring?
Factoring is defined as the discounting of invoices in order to typically accelerate cash-flow for a businesses growth.
How does factoring work?
Factoring is a simple process where a business assigns the right of invoice payment(s)to a factoring or finance company due to the business taking factoring or money advances previously on the same invoices.
What is factoring used for?
Factoring is used for creating better cash-flow in a business by converting invoices in to cash. The extra liquidity then allows the business to hire more staff, buy more inventory, and/or various other activities to assist in business growth.
Why is factoring important?
Factoring is important because it gives a business access to cash from less liquid assets like receivables so it may maintain sales momentum and service new/existing customers without waiting for cash to come through the much slower traditional collection process.
Can you make money factoring?
Besides allowing a business sales to grow and thereby generate more profit, factoring also helps the business make more money by allowing it to take advantage of early payment discounts from its suppliers. Often a supplier will offer a 2% discount for paying their invoices early.
What is the cost of factoring?
Depending on the volume and the credit worthiness, the cost of factoring typically runs 1 to 3% for most transactions.
What is the difference between factoring and accounts receivable financing?
The difference between the two types of financing seems very subtle, but can make quite a difference to companies that are more perceptive. Factoring entails the purchase of all invoices and typically fees on all invoices where as receivable finance provides a bank line borrowing base format that only charges based on the invoices used for the advance. Both methods could be beneficial depending on the company’s situation.
How does accounts receivable financing work?
Accounts receivable financing works similar to an asset based borrowing certificate. The clients’ receivable aging is sent in once a month or week and from this, the eligible line is determined. Then the company can borrow on this line using a borrowing base up to the eligible amount while charges only apply to underlying collateral.
Who is the best factoring company for the staffing industry?
An experienced factor that is also a commercial / bank lender is probably the safest factor for any industry. Finding a specialty factor is only necessary in the medical and construction industry typically. If a factor is a commercial bank lender then one knows automatically that they have a much wider range of lending ability for the business’ to grow to the next level. Additionally, a commercial bank lender is highly regulated which gives a higher level of trust and reliability that the institution is well established and open to outside scrutiny so there must be a higher standard to comp
How banks determine lines of credit?
Banks have internal procedures that create guidelines, but to some extent, the lines’ size a point of negotiation. Of course, there are general parameters. A quick rule of thumb is a line can be 10-20% of total sales depending on industry; however, a more technical rule is that loans should be be within 1-5 times the equity of the company, but this also depends on industry and overall credit of business.
What is trade financing?
Trade financing is the financing used for importing and exporting goods. Trade finance is often a highly structured finance that uses a financial instrument called a Letter of Credit (or known as an LC).
What is a Letter of Credit (LC)?
A Letter of Credit is a secured method of payment use for international trade transactions to secure the seller and buyer by using banks that have agreed to be governed internationally the International Chamber of Commerce rules.
What is Import Factoring?
Import factoring is factoring or purchasing a receivable(s) that are generated from a company domiciled outside the U.S. that is shipping product into the U.S.
What is Export Factoring?
Export factoring is factoring or purchasing a receivable(s) that are generated from company in the U.S. selling product to a company outside the U.S.
What is Credit Insurance?
Credit insurance is a financial product to to protect a business from non-payment of an invoice. The advantage of this product is always that it is backed by a true insurance company even if the factor has an umbrella policy with discretion. Credit insurance claims are also adjusted by the insurance company’s internal unit for matters concerning claims.
What is the difference between Credit Insurance and a Credit Guarantee?
Credit insurance and credit guarantees both provide protection against non-payment of an invoice but the have different mechanisms for repayment. A Credit Guarantee is literally a guarantee from the finance company or factor, not an insurance company. The price of insurance is typically 2 to 3 times more expensive than the insurance companies that provide same protection but thrpugh their insurance products.