Tuesday, June 27, 2006

Guidelines for Factoring

Here's a few thoughts to consider when evaluating the use of factoring or accounts receivable financing as a way to improve your cash flow:

1. With some exceptions, typically only accounts receivable for sales to commercial customers can be factored.

2. Are there any existing liens against your company’s receivables? This would include loans, lines of credit, tax liens, judgments as well as pending litigation.

3. Even though the factor extends cash based on the credit of your customers, the factor will also run credit on your company. Your company’s credit is not nearly as important as your customer’s, but it is sometimes a consideration.

4. On your initial funding of existing invoices, the factor may or may not agree to purchase accounts that are already more than 30 days old.

5. Before factoring your invoices, your product or service must be completed, delivered, and accepted by that customer. The factor will be concerned with anything that might diminish the value and the strength of the accounts receivable. What are the specific details of your return policy? Do you owe any money to your customers which could be treated as an “offset” to the monies owed your company?

6. Factoring involves the sale of your company’s receivable. Depending on the terms of the factoring program, the factor may require notification of your customers and verification that the product or service has been completed, delivered and accepted by that customer.

7. Factoring fees are negotiable and depend upon, among other things, the following:

The creditworthiness of the customer
The dollar amount you factor monthly
The average size of the invoice
The number of days the client takes to pay the invoice

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