Receivables Factoring

A Borrower’s Management Team Assigns or Sells the Account Receivable at A Discount to Its Face Value. The Cash Amount Is Expressed in Percentage Terms and Is Referred to As The “Advance Rate.” An Advance Rate Can Be Thought of As A “Loan-To-Value” And It’s Derived in A Similar Way to How A “Borrowing Base” Or A “Margin Rate” Might Be Calculated on An Operating Line of Credit By A More Traditional Commercial Lender.

Accounts Receivable Factoring Vs. Traditional Operating Line of Credit.

Both Accounts Receivable Factoring and Operating Lines Are Considered Forms of Post-Receivable Financing, Meaning an Invoice Has Been Generated (As Opposed to Purchase Order Financing, Which Is Pre-Receivable). Assuming A Commercial Borrower Qualifies for Both, Why Might Management Choose One Over the Other?

There Are Advantages and Disadvantages to Both, Best Illustrated When Measured Against the Following Dimensions:

Interest Rate.

Rates Can Vary Considerably Based on A Borrower’s Risk, But in General, An Operating Line of Credit Will Cost Between 1% And 3.5% Over the Lender’s “Base Rate” (Like Bank Prime), Meaning an All-In Annual Interest Rate Of ~4% To ~9% Depending on The Jurisdiction and The Rate Environment. Factoring, On the Other Hand, Will Often Cost 1.5%-3% Per Month (For an Annualized Rate Of 20%-45%).

Duration of The Exposure.

While Subject to Annual Reviews and Margining Requirements, A Bank Operating Line Is Usually Extended to Revolve on An Ongoing Basis, As Long as The Lender Can Remain Comfortable with The Borrower’s Risk Profile. Accounts Receivable Factoring Exposure Generally Only Lasts as Long as The Vendor’s Payment Terms with Its Buyer (Usually 30-90 Days).

Loan-To-Value (LTV)

A Bank Line of Credit Will Generally Advance Up To 75% Of Good Accounts Receivable (Meaning Under Some Aging Limit–Usually 60 Or 90 Days). Many Factoring Companies Will Offer an Advance Rate Of 75-90% Of an Invoice’s Face Value. This Higher Advance Rate Is Considered Attractive by Many Borrowers and Might Justify the Higher Cost.

Purpose of Loan Proceeds.

A Bank’s Line of Credit Is Used For “General Working Capital” Support. This Means It Bridges A Borrower’s Working Capital Funding Gap; It Would Usually Be Frowned Upon (Or Even Restricted) To Use the Proceeds to Fund A Dividend.

Factoring, On the Other Hand, Often Has Very Few Restrictions on The Uses of Loan Proceeds. This Flexibility Is Another Reason Many Borrowers Might Be Willing to Pay A Premium.

Frequently Asked Questions

Get the Answers you Need to Common Questions About Receivables Factoring. Everything you need to know about Receivables Factoring and How your Business can Qualify.

Do I have to factor all my invoices?
No, you can choose which customers to factor and which invoices for that customer to factor.
Do I have to factor a minimum amount each month?
No, there is no minimum and no penalty fees. All you have to do is select the customers to factor and factor any invoices for those customers.
How much can I factor?
You are only limited by the amount you sell. If you are experiencing a high growth period, factoring is perfect. We can continue to provide financing as long as you have valid invoices.
Where do my customers send their payments?
All checks must be sent to Happy Financial Group. We will notify your customers of this in writing. However, if some of your customers send payments to you by mistake, you must send those payments uncashed to Happy Financial Group immediately. This is extremely important. If this event occurs, we will re-notify your customers to direct all payments to Happy Financial Group.
How does Happy Financial Group treat my customers if they need to speak with them?
Happy Financial Group understands the relationship between the client and its customer is key for the client to continue to succeed and get repeat business. So while we do make contact, we explain our role as lender and that the primary relationship still lies with the client. We are not a collection company and as an extension of your accounts receivable department, we will work with you on collections and customer late payments.
How are factoring companies different from banks?
Any bank that performs depositary services must be regulated by the federal government. Federal regulation requires banks to comply with very stringent reporting and liquidity measurements. When a bank lends money, they also must require their clients to comply with many provisions such as minimum net worth, monthly financial reporting, annual audits and other proof of financial stability.
How does factoring accounts receivable work?
Accounts receivable factoring lets companies access cash by selling invoices for cash advances. When a business has an unpaid customer invoice but can’t wait 30 to 90 days for a payment, accounts receivable factoring may offer a solution.
Is factoring receivables a good idea?
For the right kind of business, factoring can be an excellent way to increase cash flow – the lifeline of any small business. It can even allow you to offload some of the headaches of collecting your receivables. Many factoring companies will handle collections.
How long does it take to get factoring?
Generally, it takes two to seven days to qualify for invoice factoring, and another one to two days to receive payment from the factor. Sometimes factoring companies will check out the creditworthiness of your clients, too—they want to make sure they’re not dealing with people who won’t pay their invoices.
What are factored receivables?
Factoring receivables is the selling of accounts receivables to free up cash flow. When factoring receivables, the business will receive an advance that’s typically 80% of the invoice amount at the point of purchase. Once the invoice is collected, the business owner gets the remaining 20% less a fee.