Accounts Receivable Financing Part 3: Ten Frequently Asked Questions On Factoring

Now that I have shared with you part 1 and part 2 of Accounts Receivable Financing, or "Factoring", as we have learned, it's time to overcome your objections. I am going to accomplish this through a series of ten commonly asked questions about factoring. 

Top 10 Accounts Receivable Factoring Questions

#1 

Q. What will my customers say when they discover I'm factoring after you notify them of the assigned invoices?

A. I understand your concern, however, your customer has other vendors that that are probably factoring as well. Plus, factoring is a symbol of strength as multiple Fortune 500 companies use factoring in their funding and cashflow strategy.

#2

Q. Why do you need all of my accounts receivable as collateral and not just

the ones you purchase?

A. Accounts receivable is singular.The collateral is that one item (AR), consisting of many accounts. If the the factoring transaction was only secured by the purchases invoices, it would be like securing a mortgage with the dining room and kitchen only. 

#3

Q. Will I lose control of my billing and posting?

A. Absolutely not, invoices are only purchased after you have generated them and then posted upon receiving payment. Once posted, you are sent the posting report. 

#4

Q.You are charging 3% discount on thirty days, isn't that's a 36% interest

rate?

A. I understand why you calculated your math this way but factoring is not a loan, therefore you cannot calculate your cost that way. If you sell $100K in invoices per month and you pay 3% per month, your cost is 3% of the total invoices sold. Over a single year you will have sold $1.2MM in invoices and we will have earned $36K in fees (3%). If you give your customer a 2% discount for paying in 10 days, are you paying 72% interest? (2% on 10 days is 6% per month over 12 months = 72%)

Can you see how the math doesn't work?

#5 

Q.What if my customer does not pay you?

A. There are two reasons for non-payment by the customer. First, the customer goes bankrupt or insolvent. Second, any other reason. I am saying that most factors will absorb the risk of the debtor (customer) going bankrupt. All other reasons have to do with product or service provided for which the factor cannot be responsible. In such a case, another invoice can be used to collateralize the advance or a charge can be issued for the non-paid invoice back to you through a payment from your reserves.

#6

Q.Why do you only advance 80-85% of the invoice's value?

A. There are many reasons why a customer pays less than the invoiced amount;

product or service insufficiencies, cooperative marketing expenses, charge

backs from previous invoices and many other reasons too lengthy to elaborate

upon. During the underwriting process the factor will evaluate past history

of such "dilution" events and determine a safe advance rate based on the

empirical evidence in the applicant's historical payment profile. Another

consideration on advances is the credit profile of the debtor itself.

Sometimes advance rates are set using the credit profile of the debtor.

Advances of 70% and above are common in the factoring industry. Always

remember, you are going to get the balance less the factoring

fee once the invoice pays.

#7

Q.What if I do not factor a particular invoice, what happens to the payment that comes in?

A. This happens quite often and when it does, the funds get passed through to you with no factoring charge. The factor did not buy the invoice, so it cannot earn fees on the invoice.

#8

Q.Can I factor my invoices more than once per week? 

A. A schedule will be set up for you that best fits your cash flow needs. As long as there is a verifiable invoice representing goods or services already provided, you can be funded. The schedule is designed for you.

#9

Q.My credit history is not very good; will that disqualify me from

factoring?

A. It isn't uncommon to see an applicant's personal credit profile not be the strongest. Unless there are significant legal/moral issues in your profile, your invoices can likely be factored. 

#10.

Q.How long does it take to open my account?

A. If you are attentive to our request for documents, your account can

open in about two weeks. 

I hope you have enjoyed this three part series on factoring. It was my goal to present factoring, show it benefits, and address any objections I could think of.

If you are interested in factoring your invoices or have other funding needs, don't hesitate to reach out to me.

Thank you for reading, I hope you have learned something through this three part series on Factoring.