Getting an Advance on Your Accounts Receivable

When you have decided to establish a factoring relationship to bolster your company's cash flow, you will not initially get the full amount of the invoice. You get an ADVANCE of the face amount of the invoice. The remaining amount, referred to as the reserve, is held back until the invoice is paid by the customer. The industry standard is to hold back a 20% reserve, but can be more or less depending on the type of industry, make-up of the company's customers, and other factors.

When an invoice factoring company promises a 97% advance rate, either you or your attorney should read the contract very carefully. Make sure you know what you're getting into.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
417.849-7394

When you submit an invoice for factoring, funds get wired into your bank account for use to grow your business. But with invoice financing you do not get the full amount right away. You get an ADVANCE of the face value of the invoice. The industry standard in commercial financing is 80 % of the invoice is funded as the advance, while the 20 % is held back in RESERVE until the invoice has been paid by the customer. Once the invoice gets paid the fees are deducted from the reserve and the remainder is forwarded on to you.

While factoring companies normally advance 80 % of the invoice, sometimes the advance is lower (60 – 70%) due to issues associated with certain industries. Other accounts receivable finance companies do provide a higher percentage advance, but check the fine print because the great majority of factoring companies, like ours, have been utilizing the 80% advance for years because it is statistically to most secure method.

Invoice Factoring Companies for Particular Industries

When you are searching for a factoring company, you should realize that some are more adept at providing a solution for your particular industry than others. Manufacturers, distributors, and service companies are all industries that can be served well by most competent factors. however, construction companies, healthcare providers, and transportation firms all have certain peculiarities that necessitate a niche factoring company. Construction has its own set of issues, particularly retainage. Healthcare billing is incredibly complex due to Medicare and Medicaid, discounts from the insurance companies, and coding errors. Because of these issues, a factor than knows this industry very well is essential. Trucking companies are effected by a host of government regulations, bills of lading, and owner-operators.

Make sure that the factoring company finances invoices in your industry on a regular basis.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
(417) 849-7394

How Bonding Impacts Factoring Relationships

When a company is providing goods or services to a government agency, they may be required to post a performance bond that is issued by a surety company. This is part of the contract and the purpose of this type of bond is to insure that labor and materials connected with the job are paid for. This type of situation can affect the factoring relationship in that the bonding company will have a position in the assets in the company. In fact, the position will supersede that of the factoring company. You might think this would kill the deal, but it usually doesn't. The bond issuer and the factoring company need to get their agreements in place to allow for invoice factoring. This isn't especially time consuming IF all parties understand the bonding situation from the beginning. If it comes up during the factor's due diligence review, it could slow the process down considerably.

Kent Harlan, CPA
Ozarks Capital Funding, LLC
www.ocflink.com
kenth@ocflink.com
(417) 849-7394





There are occasions where a company looking for accounts receivable factoring is working for a city or government agency that requires a payment or performance bond from a surety company. The bond is part of the contract that insures that labor and materials will be paid for the job. Primarily in construction related situations but it can crop up in any municipal contract. The factoring company needs to know about any bonding that you have in place. The bond issuer has a position on the assets of the company that supersedes the factoring arrangement. So the factoring company and the issuer need to get their agreements in place to allow for the invoice financing. It is usually not a problem but could eat up some time to pull together, letting everyone know right away if there is a bond will speed up the factoring process.

What Factoring Can and Cannot Do

Factoring companies advance cash to companies that have a legitimate pool of business to business accounts receivable. The product or service sold must have already been completely performed, accepted by the customer as satisfactory, and invoiced to them. Until the customer agrees that the invoice is acceptable and will be paid, the factoring company cannot advance funds on it.

Invoice factoring is a great way to enhance and strengthen a firm's working capital position. But it needs to be understood what this type of financing cannot accomplish:

• Factors won't advance funds on future services or products to be shipped in the future.
• Start-up capital for a company with a new contract that needs funds for production. This type of situation would likely need purchase order funding.
• The factoring relationship can't finance equipment, inventory, or real estate. Funds derived from advances can be used for any purpose, but factors don't provide direct financing for those assets.
• Sales professionals can't use factoring to receive advances on commissions.
  

Factoring is an Off-Balance Sheet Transaction

Invoice factoring is not a loan. It is the purchase of a company's accounts receivables at a discount. As a result, advances made to the company from a factor are not classified as a liability on the balance sheet. The financial goal to keep debt to a minimum is therefore maintained. Once the customer pays the factoring company, the transaction is complete. Compare that scenario with receiving a line of credit with the bank in which frequent pay downs aren't required. The credit line will likely transition to a term loan, which does not help the appearance of the balance sheet.

As we've discussed before, funding from accounts receivable factoring is only limited by the company's pool of their accounts receivable. Because of this, a fast-growing company can get all the working capital it needs to expand.

How Invoice Factoring Companies Receive Payments

At the inception of an invoice factoring arrangement, a notification letter is sent out to all the customers asking them to forward payments to the factor. The notification letter is typically written in such a way as to emphasize that the receivables for XZY Corp. are being managed by a third party (the factor) and that the same great relationship with them will continue. Since the receivables are the "collateral" for the cash advances the company has received, it is necessary for the factoring company to have control over payments.

Occassionally, there will still be payments sent to the company. It is imperative that the company receiving the factoring services immediately forward on those payments to the factor. To knowingly deposit those funds into the company bank account would be, at the least, an action that would cause a termination of the funding arrangement. In some cases, company officials could be prosecuted for a crime.

Kent Harlan, CPA
kenth@ocflink.com
www.ocflink.com
(417) 849-7394

Recourse and Non-Recourse Invoice Factoring

When you are working to establish an accounts receivable factoring relationship, you should understand the details of the contract. In particular, you need to know the difference between recourse and non-recourse factors.

With a recourse factoring arrangement, you are required to replace a bad debt with a new receivable of a like amount (or refund the advance back to the factoring company). With a non-recourse facility, that requirement is not made unless it is determined that either the services or products weren't received by the customer or fraud was involved. When reviewing proposals, it is very important to keep these factors in mind.