A step by Step Guide to How Factoring Companies Work
Factoring companies vary from a small financial service provider to large banks with each having their terms of operations. For instance, the majority of companies offering factoring solutions deal with specific regions and industries.
Therefore, if you are considering factoring North America business then you can be sure to find a company that matches your needs within the region. Some companies may also set a minimum for each invoice or the total amount before they can conduct business with you.
Putting aside the value of invoices, industry or region where these companies operate, you must keep in mind that factoring companies are middlemen. Thus, they have two main requirements for qualifying for financing:
- You must not have existing primary liens on your accounts receivable. What this means is that there should be no other company making claim to payments once they come.
- Your customers must be creditworthy as these companies depend on their ability to collect cash on the client’s invoices successfully.
- As such, the credit score of your company may not be necessarily important. Rather, the company will be more interested on the payment history of your clients as well as their financial stability.
What then should you expect when you engage a factoring North America company? Here is a step by step guide on what to expect when working with a company offering factoring services:
- You will be required to file an application and submit vital information about your company as well as accounts receivables.
- The factoring company will then embark on preparing the necessary paperwork that makes the process legal. This usually takes between five and ten days. Depending on the company, you may be required to pay an application fee.
- With everything set and you have begun working with the company, you will need to prepare customer invoices that you will forward to the company so that they can make a cash advance immediately.
- The company will then bill the customer and make a follow up on the payment, accounting and invoicing as well as other responsibilities of payment processing. In fact, the company will have to confirm that you either delivered to products or completed the work.
- The company will proceed to advance between 70 and 90 percent of the value of the invoices purchased.
- Your clients will send their payments directly to the company, which will then release the advanced portion of your invoice to you less the financing fee.
Generally, you need to take time to evaluate companies offering factoring services by examining important aspects like pricing, application fees, monthly minimums and the advance rate. In fact, you will do well to go a step further and consider customer payment scenarios and work out the total fees for different vendors. This way, you will have a clear picture of what to expect so that you are not taken by surprise in the long run. Besides, you need to ensure that you are making profit at the end of the day because that is the whole essence of being in business.