 What
is Factoring?
Factoring, also known as accounts receivable purchasing,
is a financial service that allows you to turn your
invoices into immediate cash, enabling you to fund
your business operations. You sell your invoices
to the factor and you will receive an advance amount
immediately. This advance is often from 70-90% of
the invoice value, depending on specific situations
and industry. Factoring is typically accompanied
by a collection service, thus relieving you of all
the collection and payment processing burdens after
invoicing. The factoring
company will accept most invoices, as long as
they concern business-to-business or government
invoices (normally no private persons). Instead
of focusing on financial statements, like a bank,
the factoring company focuses on the creditworthiness
of the debtors and the invoicing process. The
factoring company assesses the debtors before
deciding to buy the invoices. In some cases this
means that, based on this assessment, the factor
will not buy invoices from certain debtors. The
factoring company can use a credit insurance company
for these assessments and insure the factor’s
credit risk.
Recourse and
Non-recourse factoring
There are two types of factoring: non-recourse
factoring and recourse factoring. With non-recourse
factoring, the factoring company assumes the risk
of non-payment by the debtors. This means that
if the debtor cannot meet its payment obligation,
the factor will not ask or charge back the advance
paid for the invoice. The cash received for the
invoice is thus guaranteed. Non-recourse factoring
will protect your company’s results from
accounts receivable write-offs.
With recourse factoring, the factor
does not assume the risk of non-payment. Thus
if the debtor fails to pay, the client would have
to pay the advanced amount back to the factor.
FactorPlus offers non-recourse
factoring, the alternative that is more advantageous
to the client.
How does factoring
work?
The factoring company buys your invoices and provides
you with funds immediately, while it takes care
of the collection process of the invoices.
A typical factoring
process:
1. You sell services
to Company A and Company B. As soon as you provide
the products or
 services,
you invoice them.
2. At
the same time, you send copies of the invoices
to the factoring company, who purchases them
and provides you with an advance payment based
on the invoice value.
3. The
factoring company takes care of the collection
process for you (phone calls, faxes,
courier
services, payment processing). Once paid, remaining
funds are remitted to your
company,
minus the factoring fees.
The factoring process will be continuous
process, repeating (weekly) or every time you
invoice, providing you with a steady flow of cash
that grows with your business. Some factoring
companies also offer the one time purchase of
one or a few invoices.
Factoring
benefits:
• improve cash flow
• ability to plan payments to creditors
accurately
• receive 70-90% of the invoice amount immediately
• reduce collection costs and effort
• credit insurance is included with non-recourse
factoring (you are protected against debtors
who
cannot pay)
• no collateral needed
• take advantage of purchase discounts by
paying suppliers early
• ability to maintain required inventory
levels
• focus on commercial relations with your
customers
• peace of mind you don’t need to
chase debtors anymore
Factoring Clients:
Most factoring companies have minimum sales requirements.
Typical prospective factoring clients have one
of the following characteristics:
• fast growth
• operate in a dynamic market
• have low capital base
• are in a restructuring phase
• expand abroad or enter other markets
• have the desire to outsource their debtor
management
Examples of client segments
suitable for factoring are:
• Wholesale/distribution companies
• Security guard agencies
• Consultants
• Temporary staffing agencies
• Printers
• Janitorial, building maintenance and window
cleaners services
• Telecommunication companies
• Infrastructure (transportation, utilities)
• Gas stations
• Graphic design companies
• Media and publication companies
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