A factoring line or an accounts receivable line of credit can also be defined as a secured credit line. This is one of the common ways adopted by companies to get more cash flow or working capital for carrying out their business activities. In the normal process, the accounts receivables are sold to the factoring companies at a discounted price. The factoring company usually considers any other secured credit lines and the inventory before buying the invoices from a company. However, in case of accounts receivable loan, the factoring company grants money in terms of a loan based on mostly invoices.
During the process, if the account receivable collateral falls short, then the factoring company considers the real-estate property of the client. The debt or amount of funds advanced is collected in the normal process, from the company’s customers’ directly. When factoring invoices, the invoice payments are redirected to pay the factoring company so that the advanced funds are repaid and closed.
Applying for a loan:
When applying for a new factoring invoice line of credit, the first item one should look for is the number of years in business. This is not a futile exercise but one needs to be aware of the factoring company representing that they have combined years of experience because this does not translate in to real history and track record as a factoring company for account receivable financing. One needs to see that factoring company has at least 10 years minimum in business and +20 years is even better. Plus 20 years in business says a lot about any business and even more about a lender if its reputation is solid without a ton of complaints (note that after so many years, one or two comments are meaningless where 5 to 10 complaints can indicate an issue potentially).
What to look for…
The most important item is to feel good with the management structure and team as many factoring companies will have sales people that are completely disconnected from the process and have not been with the organization for long. Getting to know and meet the actual people that process the day to day funding will make a big difference trust me. Best advice is to charm them and bring them a small gift of chocolates…always worked in our company.
Lastly, one should also review the factoring company’s area of expertise as it’s always best to find a factor with invoice factoring knowledge where your business needs it. For example, if you are an importer then having a factor company that knows about trade finance and letters of credit is very helpful where most generic factors would not have a clue.
Most importantly, taking a common sense approach to making a choice on selecting your factoring company is key to this process before just giving off your invoice factoring to any finance company. Remember, your accounts receivable and resulting payments are the heart of your company so you should have confidence in your financial partner.
By Stephen Perl, MBA, MS
CEO of 1st PMF Bancorp
Providing Working Capital to Growing Businesses since 1985
For more information about invoice factoring Please visit http://www.invoicefactoringus.com/