Weigh All Factors Before Factoring

Maybe they call it “factoring” because so many factors go into the purchase of accounts receivable.

With all the ins and outs, said Gene Slatter, president of Commercial Finance Inc., it pays potential clients to shop their deal around to several factors before deciding with whom to work.

The first consideration is discount - the amount the factor deducts from an invoice to cover its cost and profit. If the client’s customer has rock-solid credit and payment is likely within 30 days, the discount may be as low as 2 percent.

On less creditworthy invoices, or those that may not be paid within 45-60 days, the discount could range as high as 8 percent.

Discounts are almost always higher - sometimes substantially higher - than interest rates on conventional loans. But the higher cost is offset by higher cash flow.

Also important: the reserve, or holdback, withheld along with the discount. Amounts range from as little as 10 percent to as much as 25 percent.

Generally speaking, the higher the reserve, the more quickly the funds are returned to the client as their customers pay off the invoices.

Reserves may be returned to the client the same day an invoice is repaid. Some accounts are settled monthly.

For example, if the face amount of an invoice is $100, the factor may write a check to the client for $85 after deducting a $5 discount and $10 reserve. The client gets the $10 when their customer pays off the invoice.

Agreements to buy an invoice may also be “recourse” and “non-recourse.” The first allows the factor to recover the invoice amount from the client if the customer does not pay. The second does not.

Some factoring is done with notification, some without. With the former, the client’s customer is informed that the invoice is factored. They may write their check to the factor, or to the client, who transfers those funds to the factor.

If there is no notification, customers may never be aware that their invoices were sold to a factor.

Slatter said notification may trigger concern in a customer’s mind about the reliability of the client, who could be an important supplier.

Also, he said, some companies who have not worked with factors before may think they will be dunned for payment on the invoice.

A few factors, such as Inland Northwest Bank, may buy insurance on an invoice that gives them extra protection in case of nonpayment. The premium is built into the pricing.

, DataTimes