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Invoice Factoring is a useful tool in gaining much-needed working capital for businesses of any size. Even when factoring the amount continues to grow each year, many business owners and financial managers are not aware of this form of financing. This article explains some of the key components of accounts receivable factoring.
Factoring is the sale of the company’s business to business accounts receivable at a discount for immediate cash. Check for services rendered or products sold must be creditworthy customers in business, not to individuals
Important Accounts Receivable Factoring terms :.
Advance rate: The amount of money factoring company provides customers, expressed as a percentage of the invoice totals. Advance price is usually between 70% and 85%, depending on several factors such as the general creditworthiness of the customer and the type of industrial customer is
Factor :. The factor is the financing of the factoring business. Most of these companies are only associated with factors and similar services, such as purchase order financing
Reserve :. This represents the total amount of bills calculated smaller amount advanced by the factoring company. The reserve is transferred back to the client on the collection of accounts less factoring fee
Letter of Intent :. After factoring company has received the application and other data from the proposed customers and it seems that they can work with this customer, the letter of intent is issued. LOI defines the proposed terms of the relationship, subject to due diligence
UCC filing :. The only guarantee for the factoring relationship is business requirements, thus factoring company file what is called a blanket UCC filing to protect its interests. When they do UCC filing, they have a lien claims company in bankruptcy
Factoring fee :. This is the cost to the customer for the service and is usually expressed as a percentage of receivables calculated for 30 days. The fee can be anywhere from 2% to 4.5%, depending on the perceived risk on account of
diligence :. When a company applies factors, the financing to carry out the study:
(1) determine whether there are liens on the accounts in question,
(2) verify the information in the application, and
(3) check credit customer customer
subordination agreement :. As stated above, the element will have a “first position” of receivables. In other words, they have the right to receive the proceeds from accounts receivable in the event of default due blanket pledge of A / R. When the other party has a mortgage on the accounts, element will require the bank, tax authority or person to release lifted. The legal document covering Lien release is called subordination agreement
Debtor announcement at the start factoring relationship, the episode sent a letter to each business day customer client. The letter says that the company has signed an agreement to manage the accounts of the company and that future payments are making a new address. Debtor sent payments to a lock box controlled by the factoring company
Spot factors :. Most aspects of contracts require a minimum amount of factoring volume per month from customers. But there are other factors niche that allows the customer to factor accounts when necessary. This type of financing is known as spot factoring.
These terms are important to understand before you enter into a contract with the factoring company. The agreement, which is usually one year in length, should be carefully studied before signing on the dotted line.
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