What To Looking Out For In A Factoring Quote
Factoring is a financial transaction whereby a business sells its accounts receivables, also known as invoices, at a discount. Factoring differs from a bank loan in three major ways. First, the emphasis is on the value of the receivables, not the customer's credit worthiness. Second, factoring is not a loan, it is the purchase of an asset (the receivable). Third and finally, a bank loan typically involves two parties whereas factoring involves three. Companies which offer factoring services will provide you with a factoring quote as to what your accounts receivables are worth.
A company sells its invoices, even at a discount to their face value, when it calculates that it will be better off taking less of a profit than it would be by attempting to function as its customer's "bank." In other words, it figures that the return on the proceeds will exceed the income on the receivables.
The three parties directly involved are: the seller, debtor, and the factor. The seller is owed money the debtor. The seller then sells one or more of its invoices at a discount to the third party, the specialized financial organization, the factor, to obtain cash. The factor will give the seller a factoring quote as to what the receivable is worth. The debtor then directly pays the factor the full value of the invoice. Factors make funds available by focusing first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the emphasis in a bank lending relationship is on the creditworthiness of the small firm, not that of its customers. While bank lending offers funds to small companies at a lower cost than factoring, the terms and conditions under which the small firm must operate differ greatly. Bank relationships provide a more limited availability of funds and none of the bundle of services that factors offer.
From a cost and availability of funds perspective, factoring creates wealth for some but not all growing small businesses. For these businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firm's choice is between seeking angel investors for equity or the lower cost of selling invoices to finance their growth. The latter is easier to access and can be obtained in a couple of weeks compared to the six months or more that securing funds from angel investment typically takes.
A company sells its invoices, even at a discount to their face value, when it calculates that it will be better off taking less of a profit than it would be by attempting to function as its customer's "bank." In other words, it figures that the return on the proceeds will exceed the income on the receivables.
The three parties directly involved are: the seller, debtor, and the factor. The seller is owed money the debtor. The seller then sells one or more of its invoices at a discount to the third party, the specialized financial organization, the factor, to obtain cash. The factor will give the seller a factoring quote as to what the receivable is worth. The debtor then directly pays the factor the full value of the invoice. Factors make funds available by focusing first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the emphasis in a bank lending relationship is on the creditworthiness of the small firm, not that of its customers. While bank lending offers funds to small companies at a lower cost than factoring, the terms and conditions under which the small firm must operate differ greatly. Bank relationships provide a more limited availability of funds and none of the bundle of services that factors offer.
From a cost and availability of funds perspective, factoring creates wealth for some but not all growing small businesses. For these businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firm's choice is between seeking angel investors for equity or the lower cost of selling invoices to finance their growth. The latter is easier to access and can be obtained in a couple of weeks compared to the six months or more that securing funds from angel investment typically takes.
