Video: The Basics of Factoring. What you need to know.
What is Factoring?
Factoring is the sale of a company’s accounts receivable to obtain working capital. Factors are typically more focused on the quality of a company’s accounts receivable than the company’s financial performance, which can make factoring the perfect alternative for a business that is struggling to obtain traditional loans but has a strong customer base.
Know the Lingo A true factoring facility is not a loan, so it pays to familiarize yourself with some of the basic factoring terminology, which differs from lending.
A factoring facility can be structured several ways. While this presentation will not attempt to describe every nuance of factoring, you should know a couple key differences recourse versus non-recourse and notification versus non-notification.
Recourse vs. Non-Recourse
With recourse factoring, if one of your client’s customers is unable to pay an invoice or does not pay in a specified amount of time (usually 60 or 90 days), the client is responsible and must repay the advance received.
With non-recourse, the factor takes on the customer’s credit risk (their inability to pay), but the client remains responsible for most other discounts or deductions their customer may take on an invoice.
A recourse factor will often underwrite both the credit of the client’s business as well as that of its customers, while non-recourse factors are usually more focused on the quality of the accounts receivable and put less (to no) weight on the financial performance of the business.
The result of this difference is a non-recourse factor is generally able to accommodate businesses in a weaker financial condition and a recourse factor may carry a lower price.
Notification vs. Non-Notification
A notification factor is one that will contact each of a client’s customers and instruct them to make payments to the factoring company.
Each invoice issued will usually include instructions that payments must be made payable to the factor. The factor will also usually make collection calls to the customers. With non-notification, the factor may use a lockbox controlled by the factor so that checks can be made payable to your client.
Non-notification factors may have little to no contact with a client’s customers.
Due to the greater control over the flow of cash afforded by notification, this structure is generally able to accommodate businesses in a weaker financial condition.
Contact me to learn more: 203-664-1535 – clehnes@chrislehnes.com