A COMPREHENSIVE SOURCE FOR INFORMATION ON FACTORING TERMS & COMMON PRACTICES.
THE FACTORING PROCESS
Factoring is a simple extension of your current accounts receivable process.
- Following your normal course of business, you sell your product or service to a customer, and issue an invoice for the value of the goods or service.
- To factor the invoice, you follow the sale by sending the factor a copy of the invoice.
- The factor processes the invoice, and within 24-28 hours, the factor gives you a percentage of the invoice amount, called an advance payment. This is the first of two payments you receive when factoring an invoice.
- The customer, when ready to make payment, directs payment to the factor.
- When payment is received, the factor withholds a small factoring service fee, and returns the difference, or reserve back to you.
- The reserve is the second payment you receive from the factor for the invoice.
THE BENEFITS OF FACTORING
FACTORING & YOUR CREDIT
Factors do consider your financial standing when making funding decisions, but they do not rely solely on your credit standing.
They also weigh the credit of your customers and their ability to pay on open accounts. After all, the factor's primary means of repayment is your customer, not you. Hence, credit blemishes that might disqualify you from other forms of finance may be acceptable to a factor.
This component of factoring makes it a viable solution if your business is too new to have solid credit, or your credit has slipped due to unforeseeable circumstances.
COLLATERAL & LIENS
At minimum, all factors will require you to pledge accounts receivable and general intangibles as collateral.
To do this, factors file a collateral lien with the Secretary of State in the state in which your business is incorporated. This lien puts the factor in the first position to claim rights to the asset should you default on your factoring obligations.
For some factors, this is the sole lien required. For others, a blanket lien is placed on all business assets. This can pose a problem if you have previously pledged your assets in order to obtain other forms of financing, or if you wish to reserve certain collateral to attract additional future funding.
If your business presently has secured collateralized funding, factoring can still be possible as long as your present financial institution is willing to subordinate their lien(s).
With Hamilton, there is no obligation for businesses to expose corporate assets under a blanket lien. Hamilton requires a first lien solely on accounts receivable and general intangibles, and no other assets.
Not only does this reduce risk for Hamilton's clients, it allows for more flexibility in the event a business has outstanding debts with other financiers. Hamilton has a wealth of experience in negotiating workout and transition strategies for businesses with pre-existing arrangements with other lending institutions, as well as the IRS. Because of Hamilton's minimal lien requirements, such strategies are more readily achievable.
GENERAL FACTORING REQUIREMENTS
Legalities, credit verification processes and other internal controls limit to whom and where a factor can fund:
Due to convoluted liability structures associated with these industries, most factors do not fund businesses in construction or medical care providers (specifically those that bill Medicaid, Medicare or third-party insurance carriers). However, there are a few factors who specialize solely in these niches.
Most factors will only fund incorporated businesses—either C-corps, S-corps or limited liability companies (LLCs). Normally, factors will only fund invoices issued to other credit-worthy businesses, not individuals.
Most factors will not fund businesses outside the United States. Likewise, factors will generally only fund invoices issued to US or Canadian-based businesses.
Hamilton limits its funding to US-based, incorporated businesses. Hamilton does not fund within the construction industry or with medical care providers. Through Hamilton's affiliate network, we can readily refer your business to another commercial finance provider if your business falls outside Hamilton's funding parameters.
Some factors have established monthly minimums requiring you to factor a certain amount/volume (e.g., $10,000 worth of invoices) per month.
Depending on the factor's availability of funds or comfort-level, there may be limitations on the maximum amount you can factor over a certain period. Factors often set either monthly limits, or per customer volume limits. An example of the latter scenario would be only allowing you to factor $10,000 a month in invoices for your customer, XYZ, Inc.
There are factors, however, that do not impose any volume requirements or monthly minimums, a benefit if factoring is used to beat seasonal variance.
To better fit the needs of a diverse client list, Hamilton does not impose monthly volume requirements. This allows companies to factor as frequently as needed.
Since time is a significant variable in factoring, it is important to know how quickly you can expect to get money from a factor.
Initial Funding Turnaround
Initial funding turnaround can take anywhere from three business days to two weeks. The speed of initial turnaround depends on how the factor performs due diligence and the systems in place to accelerate verification of accounts receivable and invoices.
Realizing the importance of quick initial turnaround, Hamilton does everything within its means to expedite the initial set up. Hamilton's initial funding turnaround typically takes 3 to 5 business days depending on the speed with which required documentation is submitted by the client.
Once a client is set up with a factor, turnaround for subsequent factoring typically ranges between 24 and 48 hours. Factoring invoices of new customers can sometimes take longer.
Funding turnaround at Hamilton normally takes 24 hours or less depending on the money transfer method.
FACTORING COSTS & PRICING
Set Up Costs
Most factors will require that you absorb the initial costs associated with set-up. These costs cover lien searches, lien filing, credit reports and other overheard. A factor my bundle the set-up fees into one application fee or may piecemeal the fees, charging you for each part of their due-diligence.
Like other factors, Hamilton presently charges a nominal fee associated with set-up.
The factoring fee is also known as the discount rate, and is what the factor charges for the use of their funds. There are typically two variables factors use to determine their fee: gross amount of the invoice and days the invoice remains outstanding. Given these two variables, there are numerous methods factors use to calculate their fees.
Hamilton works diligently to match its fee model to the individual needs of its clientele. Hamilton offers both block-time and per-diem pricing structures.
ESCROW REQUIREMENT FOR FACTORING
As added security to ensure payment on all invoices, your factor may require that you maintain an escrow account.
The funds held in escrow would be used to pay-off severely aged invoices, invoices involved in trade disputes, or insolvency issues.
Escrow accounts can be managed in a number of ways.
The amount required to be maintained in escrow may either be a static dollar amount or a percentage of outstanding, factored invoices. In most cases, the escrow account is replenished by withholding funds from advances and/or remittances. Thus, should any adverse events arise concerning invoice payback, the factor can be compensated by debiting the escrow account.
Cash tied up in an escrow account is simply not affordable for some businesses. Recognizing this, Hamilton will forfeit the requirement to maintain an escrow account. In this case, severely aged invoices are paid directly by the client, rather than from an escrow.