Invoice Factoring Frequently Asked Questions
A/R Financing FAQ
We hope the following invoice factoring frequently asked questions (FAQ) and answers will provide you with an understanding of invoice factoring (also known as A/R factoring), what it is, how it works, why you would choose to factor, and how your company can begin the funding process to safely enhance your working capital and cash flow.
Every industry has its own terminology and nomenclature, and invoice factoring is not any different. The verbiage and steps can be confusing and we stand ready to clear up any misconceptions you might have about factoring companies.
Please get in touch with us in confidence today to see how we can assist you with Bankers Factoring different types of factoring and invoice finance services.
What is Invoice Factoring and How does it Work?
Invoice Factoring or the factoring of receivables is the purchase of valid Commercial B2B (business to business), and B2G (business to government) Accounts Receivable (A/R) at a small discount for cash.
The two primary types of Invoice Factoring are recourse (you take the credit risk) or non-recourse (where Bankers Factoring takes all or some part of the credit risk).
Most business owners who look at factoring have selling terms that are usually Net 30-90 days to their large credit-worthy customers. A/R Financing (through this short-term cash advance) accelerates your accounts receivable forward by 30-90 days.
An invoice factoring company, also known as a Factor, provides factoring services by buying your invoices at a discount where you get 70-90% upfront and the balance of the invoice less the factoring fee when your customer pays the invoice in 30-90 days.
Invoice factoring can be either with recourse back to you or without recourse (what Bankers Factoring offers) where the invoice factoring company takes a specific type of credit risk, which is typically bankruptcy, insolvency, or protracted slow pay by your customers.
Your company, of course, is responsible for your product or service meeting the quality, quantity, and timeliness standards set by your customers (the Account Debtors).
Factoring is also known as:
Accounts receivable factoring
Accounts receivable financing
AR factoring (Google confuses the two)
Accounts receivable loans
Accounts receivable funding
Ledgered line of credit
An Invoice or A/R Factoring Company also known as Factors can be a part of banks or independent companies like Bankers Factoring, buy your invoices to a third party B2B or B2G Customer at a discount with or without recourse.
If you have solid B2B or B2G Customers and waiting 30-90 days for payment puts your business in a cash crunch, then you are a candidate for invoice factoring. Factoring can cost 1.5-5% of your total invoice amount so make sure you have the gross margins to factor your invoices.
Factoring is the most common type of asset-based lending to turn good receivables into working capital. Unlike bank financing which is balance sheet and tax return driven, factoring is based on the creditworthiness of your B2B or B2G customers.
Bankers Factoring pays you 80-90% of your invoiced amount the same day after verifying your customer is happy with your product or service and the invoice is in their A/P system to be paid. Your customer pays Bankers Factoring in 30-90 days. After their payment clears, we rebate you the 10-20% reserve minus our fee.
You invoice your customers for your goods or services. You sell the batch of invoices to a factoring company. The factoring company pays you 80-90% of the invoiced amount immediately, after verifying that your customer is happy with your product or service and the invoices are set to be paid in 30-90 days. Your customers pay Bankers Factoring directly.
The initial funding takes 3-7 business days after we receive your signed agreement. If you wish, you can send some invoices to be funded with the signed contract to expedite your funding. Subsequent fundings are typically same day.
The Account Debtor is the technical term for your B2B or B2G customers. An Account Debtor is a company or government entity that owes a dollar balance to another party. In a factoring transaction, that is your creditworthy B2B or B2G Customer, who you have invoiced for the delivered services or goods (in arrears) on open terms. In 30 to 90 days, the Account Debtor will pay Bankers Factoring what they owe you on the invoices we purchased from you.
The Accounts Receivable Verification is part of the ongoing due diligence process of A/R Factoring. Bankers factoring wants what you want, for your customer to be satisfied with your products and services. Bankers Factoring company will verify the open accounts receivable owed to you by your customer (the Account Debtor). We will verify that the Account Debtor is happy with the quality, quantity, and timeliness of the services or products you provided. The invoice dollar amounts, terms, and conditions will also be confirmed.
How Much Does Invoice Factoring Cost?
Factoring fees and factoring advance rates vary greatly among other factoring companies. Bankers Factoring tries to keep our AR factoring rates and fees pretty simple and easy to understand. Our advance rates run from 75-90% while our fees can be anywhere from 0.9-2.9% per 30-days and then a daily prorated factoring rate thereafter.
We will wire the advance rate times the amount of your invoice (85% of $20,000, for example) to your bank account.
When your unpaid or outstanding invoices are paid, we wire to your bank account the remaining balance (15% minus the $400 factoring fee using the above example). We run about 97% same-day funding and only occasionally do we need 24 hours to get you funded.
These are the abbreviations for Business to Business (B2B), Business to Consumer (B2C), and Business to Government (B2G) Sales, respectively. Invoice factoring is for B2B and B2G Sales on open terms of net 30 to net 90 days. ACH Loans & MCA Advances can typically be used for companies with B2C Sales that need funding, but they are typically more expensive than invoice factoring.
Large companies pay small companies slower every year. Many S&P500 companies now have net 90-days(!) as their standard payment terms. How can a small company survive? Bankers Factoring is comfortable with Net 90 on credit-protected account debtors (your customers).
The factoring process is a critical subset of business finance to the millions of not yet bankable companies in the USA.
A factoring broker finds the right factoring company for his business clients who are looking for working capital by selling their accounts receivable to a factor like bankers Factoring. Many factoring brokers also broker other types of factoring or they specialize in a certain industry like trucking factoring brokering or staffing factoring brokering.
That is a great question. Bankers Factoring is a direct funder of both non-recourse factoring and PO funding. Don’t be afraid to ask! As you look at how many factoring referral sources put themselves out there on the web, it is hard to tell the difference between a true funding source and a broker. However, Bankers Factoring gets many clients through bank turndowns, Factoring brokers, online referral sources, ISO, and intermediaries so you could end up with us as our client no matter the source.
Yes, if the alternative is you are out of business, you have no working capital to grow, and you use the faster working company wisely by taking supplier discounts. In addition, if credit protection is included like Bankers Factoring’s Non-Recourse A/R Financing, then it is definitely worth the cost and why factoring invoices is a good idea.
Ledgered Lines of Credit is a mixed approach to financing if you might not qualify for a traditional bank line of credit. You will see this many times with bank-owned factoring companies as they still purchase your accounts receivable, but they advance against the pool of accounts under a borrowing base format, similar to advances under an Asset Based Lending facility.
No, Supply Chain Financing or Reverse Factoring is initiated by the larger companies who have agreements with multi-national banks to pay their smaller vendors within 10-days vs 60-120 days. Large companies many times make a small fee on this transaction.
Invoice Factoring is initiated by smaller companies who don’t want to wait 60-120 days to be paid by larger companies. These smaller companies contract with an Invoice or A/R Factoring Company to buy their invoices on a recourse or non-recourse basis (if Bankers Factoring is their Factoring Company).
No, PO Funding is a precursor to Invoice factoring. The main difference is when each is utilized in the process. Invoice factoring is used after a business sells and delivers the goods or services. PO financing, available only to businesses that sell physical goods, is used to buy goods before you can generate a factorable invoice.
What is Cash Against Documents or a Vendor Guarantee? Cash Against Documents or documentary collection is a process in which a seller instructs their bank to forward documents related to the export of goods to a buyer’s bank with a request to present these documents to the buyer for payment. It also indicates when and conditions on which the bank can release these documents to the buyer.
As the funding source for US-based Import companies, Bankers factoring often pays the seller (our client’s supplier) when documentation is presented that proves the finished goods meet all quality, quantity, and timeliness requirements of the Account Debtor (our client’s customer) as part of our Vendor Guarantee Program.
Yes, get us all your financial data quickly and we can review whether we can help your situation, pre or post-filing of bankruptcy. We might see a way to not file bankruptcy at all especially if MCA loans put you in this situation.
Even with back taxes, Bankers factoring can probably help. We have deep experience negotiating payment plans and subordination agreements with the IRS. Just make sure you disclose your tax situation upfront.
The IRS 8821 form allows Bankers Factoring to track tax payments to ensure that our clients are paid up to date with the IRS. If you fall behind, we will be informed and therefore, let you know before any liens are placed on your business. If you already have a tax lien or have fallen behind, let us know. We can work with tax issues.
Unpaid taxes can have a hidden lien on your business and your main asset, your accounts receivable. We want to monitor your tax situation to make sure you can stay fundable via Bankers Factoring invoice factoring programs.
Invoice Factoring gives your business the power to grow without giving away equity or taking on debt. Contrary to what others say, accounts receivable factoring is NOT only for struggling companies. More often, invoice factoring is for fast-growth companies.
Financially smart companies use factoring as a powerful tool to release capital tied up in their Accounts Receivables (A/R). We have compiled a list of reasons why companies use invoice factoring. A/R Factoring has cost benefits with the added services and features credit scores, business credit, and collecting payments.
Under UCC § 9-102(a)(3), an account debtor means “a person obligated on an account, chattel paper, or general intangible,” but does not include persons obligated to pay a negotiable instrument. In invoice factoring, an account debtor is your customer who is the obligor on an account receivable.
The problem with a flat rate of let’s say 5% is that your factor has an incentive to beat on your customers to pay sooner. The sooner your customers pay, the more profit a flat rate factoring company makes. Also, there is typically a hard chargeback date 60-90 days out.
Daily factoring rates after the initial 25 or 30-day rate is ALWAYS a better deal. Why? Compare a 1.5% 30-day factoring fee plus a daily factoring rate of .05% (1.5% divided by 30) versus a 1.4% 30-day rate plus a .7% 15-day rate thereafter. With the daily rate, if your customer pays in 32 days, you pay 1.6%, with the .7% 15-day rate you would pay 2.1%. 31% more every time you sell and invoice! Bankers Factoring is a firm believer in daily rates for our entrepreneur factoring clients.
How is Invoice Factoring different from a term loan or business line of credit from a bank?
Factoring is not a loan. Rather, it is the process of purchasing valid Commercial Accounts Receivables (your invoices) from your business at a small discount. Factoring your accounts receivables means that you actually sell them to Bankers Factoring, as opposed to pledging them as collateral, as you would to a bank or asset-based lender (ABL) along with additional collateral for a business line of credit or revolver.
In addition, a bank loan involves two parties; the bank and the borrower (you). Invoice factoring involves three parties; your company, Bankers Factoring, and your company’s customers (the account debtors).
Yes, selling to the US Government and government entities at every level is a great way to diversify your sales and it is recession-proof. The rules are slightly different under the Federal Acquisition Regulation (FAR) how Bankers Factoring takes assignment of the proceeds but we have deep experience in government Invoice contract factoring and government purchase order financing. We are big fans of small businesses selling into government procurement as a great way to grow your business.
Yes, if you mean can you pick and choose which invoices to sell to Bankers Factoring. Use Bankers Factoring as the ultimate working capital tool to sell us 20-100% of your open invoices on credit-approved customers.
If you mean sell us one invoice and that’s the end of our business relationship, then the answer is no. That is known as Spot Factoring. The cost to add a client is too high and the risk is too great for us to buy one invoice and then sever our relationship.
It is not required, but the more you factor with Bankers Factoring, typically the better your factoring rate. In addition, you can exclude specific account debtors or specific divisions of your large customers.
Factoring companies check the credit of your customers. That is the main variable in invoice factoring. They will look at your personal and business credit, not for a minimum score, but to make sure there are no open liens, filings, or judgments that may cloud your good open accounts receivable.
Because the invoices serve as collateral or invoices are the asset we are purchasing from you, accounts receivable financing can be a great solution for borrowers with bad credit. In fact, Bankers Factoring is not as interested in your credit history as in the quality of your invoices.
Bankers Factoring is a commercial financing company specializing in business funding with poor or limited credit. We even have bad credit business start-up financing available as part of our accounts receivable financing with bad credit program.
A/R funding with less than perfect credit issues is one of the more frequently asked questions (FAQ) we hear about invoice factoring.
Because we give you Unlimited Working Capital, Credit Protection, and include A/R Management Services in our fee, the real risk is your performance in meeting your customer’s needs and, sadly, the occasional fraud. We ask that you stand behind your work and be honest with us in all our dealings. This is why we ask for Personal Guarantees from your company’s ownership.
If you have corporate ownership, are not privately owned, or private equity-backed, many times a validity indemnification or “bad boy guarantee” will suffice. Personal guarantees and validity indemnifications, at least for Bankers Factoring, are about making sure we have the owner’s and senior management’s cooperation and commitment if problems arise and not because we want to sue you to get back our principle to pay back our little old lady investors. We have no interest in going after helpful guarantors; we are just looking to come out whole.
Almost every business that sells on terms of net-15 to net-120 days can qualify for A/R Factoring. Our guidelines are straightforward: if you have A/R due to a sale in a business to business (B2B) or business to government (B2G) transaction, you probably qualify. Any size invoice can be factored, provided the services you offer, or the products you sell have been provided or completed and delivered.
Your customer will be notified to pay us directly. When invoices are factored with Bankers Factoring, we will give you special verbiage to enter into the remit to box on your invoices. In the old days, we gave our clients a stamp with the address to send payment to before being mailed to your customer.
If a bank has a lien on your company’s accounts receivable, you should let us know right away. We will ask the bank to enter into an intercreditor agreement with us or subordinate at least the lien on your accounts receivable. Some banks will accommodate the request, and others may decline depending on your circumstances.
Banks are balance sheet driven, so that will be a driving factor. Our number one referrals come from loan officers willing to help out the client with cash flow needs. They are very familiar with this kind of interim financing. One other alternative is to pay off the loan if there are plenty of receivables to leverage the buyout. Bankers Factoring also participates with banks as we can add liquidity to their position and safety with our non-recourse factoring.
Bankers Factoring is a non-recourse factoring company which means we take the credit risk if your customer (the account debtor) files bankruptcy, goes insolvent, or because of financial difficulties is forced into the situation of protracted slow-paying of invoices. You are, of course, responsible for meeting your customer’s quality, quantity, and timeliness needs, and living up to the terms of their vendor agreement.
If the Factoring Company takes the credit risk and doesn’t ask the client to replace or buy back an invoice for reasons of bankruptcy, insolvency, or protracted slow pay, that is a non-recourse factoring arrangement.
The last thing we want is for you to lose a customer. We are not a collection agency. We will never harass your customers for money. Maintaining your customers’ goodwill and confidence is of utmost importance to us.
Our client’s customers often refer us to their other vendors needing working capital to make them stronger financially and a better provider of services. Your customers would not refer us to their other vendors needing A/R Funding if they did not appreciate what we bring to the vendor-customer relationship.
No, not at all. They would still be your customers. You still bill them and communicate with them. Bankers Factoring takes the role of quality control for you A/R verifying your customer’s satisfaction with your services.
Depending on your industry and dilution risk, a factoring company will advance you from 70-95% against your invoices to credit-worthy customers. Staffing and trucking tend to get the higher 90%+ advance rates, while construction, fresh seafood, and fresh produce tend to get the lower 70-75% advance rate (because of the higher risk of chargebacks, disputes, and spoilage).
A/R Factoring rates are determined by risk and monthly volume. A smaller company factoring $10,000 per month might pay 4-5%, and a larger company doing $2,000,000+ per month might pay .9-1.1% per thirty days. The likelihood of chargebacks, returns, and dilution will also vary the factoring advance rate and factoring fee up or down to adjust for greater risk.
We hope you found your answers in our invoice factoring FAQ. Have your Invoice Factoring Questions been answered? Are you ready to get fast and safe invoice funding?