Factoring is a business finance tool used by firms to increase cash flow. A factoring company provides business finance in the form of immediate cash advances for the transfer or sale of a target firm’s accounts receivable invoices. The factoring company makes money from interest and fees. Typically the factoring company pays 80% of the face value of the invoice up front to the business, with the remainder being paid upon collection. The invoiced customer either submits payments directly to the seller (non-notification system) or the factor (notification system).
Factoring allows a freight business to receive needed cash quickly by selling their accounts receivables at a discount. With the current economy a business can use factoring to help overcome cash flow issues. This process is quite different than a traditional business loan. In order to get the best deal a business should be very knowledgeable on this subject or use a factoring broker.
Starting Factoring Business Guidelines:
1.) Secure adequate capital to fund your business. A factoring company is in the business of providing access to cash. As a result, the availability of operational cash reserves are important to its success. In addition to your financial contributions, consider small business loans available through the U.S. Small Business Administration’s guaranteed loan programs. Look closely, however, at the impact that the cost of securing capital for the company will have on profits.
2.) Contact SCORE, Counselors to America’s Small Business, to find a mentor, if you are not familiar with the industry standards in the factoring business.
3.) Set up a brick-and-mortar office for your factoring business or establish your client interface as an online entity. In either case, the standard business equipment will be needed, such as computers, desks, file cabinets, etc. Security will be a significant consideration if a website is maintained and potential client information is gathered. Hire a reputable webmaster that is knowledgeable in providing both design and security features.
4.) Hire an experienced attorney for legal advice, such as drafting the terms of your company’s standard factoring contracts. There are two major types of factoring agreements. One involves recourse financing where the borrower is responsible for uncollected invoices. The other agreement is based on non-recourse financing where the risk of collection is assumed by the factoring company. A lawyer experienced with assisting clients in this area will be able to utilize industry-appropriate contract terms based on the type of financing the company will provide.
5.) Perform due diligence on the business borrower and its account receivables. Gather outstanding account-receivable documentation from the business, such as the original invoices and an accounting of past payment history. This information will determine how collectible the invoice is and may require a deviation from the company’s standard-factoring contract terms. Also, check the health of the borrowing company. The financial health of the borrower and the availability of collateral will determine whether a blanket lien is warranted in the factor contract.
6.) Market your factoring company by becoming active in business associations. Volunteer to speak at meetings and conferences. Set up a professional website even if you have a brick-and-mortar location. Advertise in business publications.