Business Leap Frontier

The Invoice factoring is very important tool for acquiring the required working capital for any size of business. In spite of the fact that the volume of factoring is increasing every year, there are many financial executives and the owners of the businesses who are still unaware of this kind of factoring.

Factoring

Factoring is a form on instant cash in the form of sale of the company’s business to the account receivable business at a discount. It is very important to note that the type of the products sold or the services rendered must be for the creditworthy customers of the business and not to the individuals.

Let’s discuss some of the important terms or the components of the accounts receivable factoring:

• Factor – It is a funding source for the transactions of factoring. Many of the companies are just occupied with the factoring business and similar kind of services like the funding of the purchase order.
• Reserve – Reserve means the total invoice amount factored minus the funds advanced by the company which is factoring. The amount of reserve gets remitted to the client on collection of the invoice minus the fees of factoring.
• Advanced Rate – Amount of funds given by a factoring company to the customer is expressed in the form of percentage of the total of the invoices. Generally the advance rates are anything in between 70 to 85 percent. This again depends on a lot of factors like the credit standing of clients and type of industry of the client.
• Letter of Intent – Once the factoring company receives the application and all the other required documents from the projected customer and it also appears to have a positive outcome with the client, then the letter of intent gets issued. This letter of Intent specifies the relationship terms that is subject to the due diligence.
• Filing of the UCC - The one and only security of the relationship of factoring is the business receivable. Therefore, the company that is factoring will file a blanket UCC for protecting its own interests. When the UCC filing is done, the factoring company gets lien against the receivables of the company in case of bankruptcy.
• Fees of Factoring – It is a cost to be borne by the client for factoring service which is generally expressed in the form of percentages of the receivables that are factored per month. The fees range from anywhere between 2 to 4.5 percent. This depends on the perception of the risk involved of the receivable account.
• Due Diligence – Whenever an enterprise applies for the factoring agreement, the source that is funding investigates whether the liens on receivables are in question, validate the contents of the information provided, and verify the credentials of the customers of the client.
• Agreement of subordination – The factoring company would have a right of lien in the proceeds of the receivables in case of default in the payment due to the blanket lien on accounts receivables. If some other person also has lien on receivables, then the factoring company will also require the taxing authority, bank, or the individual to release encumbrance. The document that fulfills the release of the lien is called as the agreement of subordination.
• Notification to the debtor – During the beginning of the relationship of factoring, the factoring company sends the letter to every business customer of its client. The letter gives an explanation that the company that is factoring has gone ahead with the agreement for managing the client’s account receivables. It also states that the payments have to be given to this new address. The debtors will then send the payments through a lock box which has complete control of factoring company.
• The Spot Factoring – Many contracts of factoring need minimum volume of factoring amount every month from its client. There are several other factors that permit clients to factor the invoices only when they are needed. This kind of funding is termed as spot factoring.

Before entering in the factoring agreement, you need to understand these terms properly. This kind of contract is typically of one year and therefore needs to be properly studied before agreement signing.