Invoice Factoring Should Be Considered in These Times of Tight Credit

It was bound to happen. The years of poor underwriting standards in which anyone with a pulse could get a home loan have caught up with the credit markets. The repercussions have spread through all facets of the lending industry, making it difficult for even credit-worthy companies to get business lines of credit. With invoice factoring, a company can get the working capital it needs to either survive or grow.

How important is cash flow to a company?

Cash flow is the fuel for a company's engine. A business can be showing a nice profit, yet be cash poor. Maintaining a steady and predictable cash flow is essential for operational efficiency, vendor relations, and growth. Invoice factoring unlocks the power of a firm's accounts receivable.

When a company is struggling due to the long wait to collect from their customers, it causes problems in meeting current expenses like payroll, rent, and other ongoing obligations. When a company recognizes these issues and chooses to adopt a policy of bringing cash in faster through factoring, life becomes easier. Instead of waiting 30, 60, or even 90 days for a customer to pay, the company submits invoices to the factoring company and receives anywhere from a 70% to 85% advance of cash, which is immediately wired to the company's bank account.

What companies are candidates for accounts receivable factoring?

Distributors, manufacturers, service providers, and construction companies are just a few of the types of firms that can enhance their working capital position by factoring invoices. Any company that has business to business accounts receivable on its books can usually quality. The goods or services must be completed in full, accepted by the customer in good order and there must not be any offsets to the invoice. The factoring company needs to file a UCC on the receivables so they can have a first position. If there are liens against the company or the A/R is pledged, there must be a subordination agreement executed.

How is a factoring relationship established?

A simple application needs to be filled out, which requires basic information about the company, its operations, and owners. An aged receivables report, articles of incorporation, last two years financial statements, and master list of customers are items that need to be submitted with the application.

After reviewing the application, a factoring company representative will usually call the client to ask any additional questions. Then a letter of intent (LOI) is issued, which spells out the proposed advance rate, fee structure, and other information. After agreeing to the LOI, the factor performs some due diligence, such as doing a lien search and running credit reports on the customers. The credit history of the client's customers is critical not only to the fee structure, but whether the factoring relationship can exist. After the due diligence is completed, a formal contract is drawn up that is executed. Once that is done, the company can submit invoices for payment.

How can banks benefit from factoring?

As credit markets have tightened resulting in strict underwriting standards, many companies may not be able to get the working capital lines they once could depend on from the bank. Rather than simply reject their customers working capital loan application, the bank officer can provide them with the contact information of a competent broker who is knowledgeable in the area of invoice factoring. It results in a happy customer whose deposits and other services are likely to stay with the bank.

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