GENERAL FACTORING INFORMATION
What Is a Factoring Company?
A commercial finance company that specializes in the purchase of invoices or accounts receivable for cash.
Is factoring a new financing option?
Factoring has been used for centuries. It's one of the oldest forms of financing. Until recently, factoring was primarily used in the garment and textile industries. Today, factoring is a $150 Billion/year financial product and is widely used, by all types of businesses that extend credit to credit-worthy commercial customers.
How does factoring differ from bank funding?
Factors make funding decisions based on the credit-worthiness of your customers; a bank makes credit decisions based on your company's financial history, cash flow and collateral. Because factoring is not a loan, no liability appears on your balance sheet. Most importantly, a factor makes funding decisions in days or hours-while banks generally take weeks or even months
Why would a company sell accounts receivable?
Companies with recurring cash-flow problems often can't afford to wait 30, 60 or even 90 days for invoice payment. They need cash to meet immediate financial demands of their business. Factoring helps provide this cash by funding the purchase of accounts receivable, often within 24 hours after invoices are created
What companies benefit most from factoring?
We believe every company-and each funding situation-is unique. We view every situation as an opportunity to create a flexible, dynamic "win-win" structure. Factoring works well for startups as well as high-growth businesses, including those cyclical in nature. Factoring is also well suited for under-capitalized companies with strong customers, turnarounds or companies with cash-flow problems.
How will our customers be treated by Compass Funding Solutions, LLC?
Compass recognizes and respects the relationship and goodwill you have created with your customers. Compass will treat your customers with the same degree of integrity and professionalism. Any serious issues that arise will be discussed with you and handled in an appropriate manner after discussions with you
What is the major benefit of factoring?
You receive immediate cash for accounts receivable instead of waiting 30, 60 or even 90 days for customers to pay. The process works as if your clients are on a COD (Cash on Delivery) basis. You enjoy increased cash flow, while we provide credit and collection expertise and services, freeing you to concentrate on your core business. Also, perhaps most importantly, Compass' decision to finance your company is based on your customers' credit-worthiness instead of your balance sheet. If you can deliver the goods and services you've promised to your customers, and if your customers have good credit, Compass Funding Solutions, LLC can provide a financial solution, no matter how limited or problematic your company's financial history.
What does factoring cost?
Rates are based on individual and specific circumstances. Factoring rates depend on the credit-worthiness of your customers, your average invoice size, average payment cycle, factoring volume and other elements. In general, the cost of factoring is outweighed by its significant benefits: access to immediate cash, credit analysis, collection work and accounts-receivable reporting.
Is factoring a type of loan?
No. Factoring is not a loan. It is the purchase of an asset, your accounts receivable, at a discount by a financial institution called a Factor. A traditional bank loan uses all of your company assets as collateral. Invoice factoring, or accounts receivables factoring, relies on the credit-worthiness of your customers, not your balance sheet or history. Banks are heavily regulated, and large finance companies are driven by an assortment of pressures. When times are tough, banks and finance companies limit lending.
Small Businesses that have no track record, a weak balance sheet, a history of financial problems, are in turnaround mode or are otherwise undergoing big changes, often cannot find a lender at any price. In such cases, factoring is the ideal financial solution.
What is the difference between factoring invoices "without recourse" and factoring invoices "with recourse"?
When an invoice is factored without recourse, it is considered factoring on a "non-recourse" basis. In this situation, the factor takes the credit risk of the client's customers, thereby protecting the client from credit loss. When an invoice is factored with recourse, it means the client is ultimately responsible for payment, regardless of whether the client's customer pays. At Compass we offer both "non-recourse" and "recourse" factoring at rates that make sense for your business.
When is factoring NOT a good fit for a business?
Generally factoring is not a good fit in the following situations:
1. Your business operates on low margins (less than 10%).
2. Your business has significant cash reserves free of cash-flow concerns.
3. Your business serves as a sub-contactor to a less-than-established general contractor.
4. Your business involves Medicaid or Medicare-based accounts receivable.
5. Your business sells almost entirely to less than credit-worthy customers.
6. Your business has a significant amount of accounts receivable that are already overdue.
Factoring Information - HOW FACTORING WORKS
What type of invoices can I factor?
You can factor almost any valid invoice for a service already performed or a product already delivered to a credit-worthy business or government entity.
How much money can I obtain through factoring?
We typically advance you 80-90% of your receivables immediately, and the balance (less our fees) when invoices are paid.
Example: if you have $100,000 in accounts receivable on your books, you could immediately receive up to $90,000 in additional working capital. The balance due to you of $10,000 (less our fees) will be paid to you when your customer pays the invoice. If your sales increase, so will your receivables-and so will the amount of capital available to you on an ongoing basis.
Factoring may be the best way of financing sales, because the amount of available capital grows in direct proportion with sales success.
Does a bank loan make more sense for my small business than factoring?
Probably not. Banks often have restrictive lending requirements relating to cash flow, profitability, equity and years in business that limit them from making loans to many small to mid-sized businesses. Factoring companies are not in the lending business; we purchase accounts receivable from credit-worthy customers. The decision to purchase your invoices is influenced primarily by the quality of your customer base and their financial stability-not the financial fundamentals of your company.
What if my company has a bankruptcy, bad credit, poor financials or other derogatory information or history?
In general, these are not deal-breakers, as funding decisions are based on the credit-worthiness of your customers-not on your credit.
What can I do with the additional cash I receive from factoring my receivables?
You can use the additional cash to take advantage of suppliers' discounts, meet payroll, satisfy operating overhead, purchase needed inventory or equipment or just establish good credit for future expansion.