A Guide to ‘What is Factoring?’

A Guide to What is Factoring

What is a Factoring?

Factoring sometimes referred to as Invoice discounting, is a commonly used financing tool for small business. When a small business sells its goods or services, it generally offers payment terms to its customers, rather than require cash at the time of sale. There are many sound reasons for this business practice. This includes increasing sales and developing long-term relationships. When such a transaction takes place, the business is left with an account receivable which it holds on its books until the customer pays it turns into cash.

What is a Factoring Company?

A factoring company specializes in invoice financing for small to medium businesses that are non-bankable offering working capital solutions. Typically, a factoring company buys your invoices from a creditworthy client. After this, they will advance you up to 90% of the invoice amount immediately and will give the remaining balance when your clients settle in full. Invoices can be submitted for factoring directly upon completion of work or product delivery. Revenue flows directly and instantly to you with no delays or collection hassles. The better, more experienced factoring companies often non-recourse factoring, assuming credit risk and responsibility for client payment.

What Are the Benefits of Invoice Factoring?

These are just a few of the benefits of factoring for your business:

  • Cash in your hands in as little as 24 hours
  • Up to 90% advanced on Your Invoices
  • We become your credit department
  • Payroll funding
  • IRS issues and liens can often be a non factor
  • Pre-approve your client’s credit
  • 24 years servicing industries of all kinds
  • Credit protection against bankruptcy through Paragon’s Non Recourse Factoring

What is the Factoring Process?

The factoring process is very straightforward. Acting under a simple agreement, a business sells its accounts receivable to a finance company (a “Factor”) in return for an immediate cash advance-usually 80-90% of the invoice amount. Invoice discounting is normally conducted under what is called “full notification,” meaning the account debtor is made aware that the invoice has been sold, and is directed to make payment directly to the finance company. The Factor then follows for payment of the receivable, deducts its fees from the proceeds, and remits the balance to the business. Invoice discounting is the selling of accounts receivable to a third party to improve cashflow.

The invoice factoring process

STEP 1 – INVOICES INTO CASH

You have Open B2B or B2G Invoices and need cash now.

STEP 2 – VERIFICATION

Paragon verifies your customers are creditworthy and love your product and services.

STEP 3 – SAME DAY CASH

The same day we wire you 80-90% of all your open Invoices.

STEP 4 – BALANCE RECEIVED

In 30-60 days, your customer pays the lock box and you get the balance less Paragon’s minimal fees.

STEP 5 – REPEAT

Repeat when you have new invoices for continued, unlimited working capital!

Is Factoring Considered Debt?

Factoring is not debt. When the account receivable is sold for cash, it is just that – a sale. For this reason, small businesses are often free to enter into factoring arrangements with a finance company even if they already have a relationship in place with a bank. Also, given the simplicity of the transaction, factoring arrangements are typically consummated quickly—often within a few days.

What is Non-Recourse Factoring vs Recourse?

With Non-Recourse Factoring, the factoring company gives you a credit guarantee that they are responsible for the collection of your invoices. It might be all your invoices or just those from certain clients. Typically, this guarantee is in case your client files for bankruptcy. This is a critical point to understand that it is not a guarantee that you are protected for good or services that your client disputes for not meeting specifications. You are also not protected if your clients pay slower than normal. However, this “insurance policy” against bankruptcy is critical for your survival. Toys R Us, Vitamin World, Gymboree, Payless ShoeSource, Gander Mountain could be your ‘risk-free’ client, yet they are all examples of companies that filed bankruptcy that were once thriving companies.

Recourse Factoring means that if the invoice is not paid by your client by a certain date, the factoring company can charge that invoice back to you or you can replace that invoice with another good invoice. In some ways, this is similar to a line of credit from a bank with a borrowing base as one of the loan requirements. If an invoice becomes unpaid, for example, longer than 90 days a bank won’t let you borrow against it or a factor will ask you to replace either the advanced funds or give them another good unfunded invoice.

What is Factoring vs Purchase Order Financing?

Factoring is both a cost-effective and relatively simple process. Your creditworthy client receives the product, the factoring company verifies a few important facts. This includes your customer’s happiness with the quality, quantity, and timeliness of your product (documentation requirements are also confirmed). You will receive an advance up to 90% of the invoice amount now. Also, in the future receive the balance less the factoring fee when your client pays the factoring company.

What if you don’t have the money to buy the goods? This is where Purchase Order Financing or a Vendor Guarantee applies. PO Funding is where you need the factoring company to buy the goods for you (Cash Against Documents (CAD) or a via a Letter of Credit) or you need to use the factor’s creditworthiness for your vendor to release the goods and be paid from the Factoring proceeds (a Vendor Guarantee).

Remember, you can have Invoice Factoring without PO Funding, but you cannot have Purchase Order Financing without Invoice Factoring.

WHAT IS INVOICE FACTORING VS PO FUNDING?
– Download the PDF

 

Is Factoring Viable for Start-ups or other Non-Bankable Businesses?

One can use factoring even if a company is weak or just starting out. The determining element in any factoring transaction is the creditworthiness of the account debtor, not the client company itself. This is because the finance company is being paid back directly by the account debtor, as the account receivable is collected, and not by the client. Consider, for instance, a company selling a product to Walmart. The account receivable from Walmart is considered good collateral for any cash advance made to the company. The company can expect short-term source funding regardless of its financial strength or wherewithal by selling this account receivable, regardless of its circumstance.

 

What are Examples of Companies that Use factoring?

Many industries rely on factoring as a key means of finance, among them staffing, healthcare, construction, apparel, and consumer goods. As a result, factoring is a widely accepted way to raise cash and accelerate cashflow, for small and big companies alike. Brokering opportunities in this field puts you good company.

 

Does My Business Qualify for Factoring?

  • Startups, Turndowns, Bank Exiting or underperforming Banking Relationships can qualify

  • Personal Credit of Owner is not an issue; we look at your customer’s ability to pay

  • Fast Growing Companies with sales of $30,000-$10,000,000 per month

  • Paragon can move Quickly on New Client or High Growth Client Approvals

  • Non-Recourse Factoring for All Industries

How Much Does Factoring Cost?

invoice factoring calculator
Are you wondering how the cost and fees stack up compared to MCA loans, bank business loans rates, SBA loan rates, other lenders and their financing packages? Use our powerful invoice factoring calculator to compare factoring rates.

How Do I Become a Factoring Broker?

Since our start 24 years ago, Paragon has devoted itself to the cultivation, education, and support of our nationwide factoring broker network. Whether you are an intermediary, CPA, attorney, bank loan officer (your bank keeps the depository relationship and gets a healthy loan applicant in the future.), insurance agent, ISO, business consultant or an online referral source, Paragon can help you improve the way you do business.

Get started as a factoring broker.

What is Needed to Get Started with Invoice Factoring?

Use our fast, safe and secure online funding application, Contact Form or call us at 888-400-5931.

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A Guide to ‘What is Factoring?’

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