As defined by Wikipedia, www.wikipedia.org; Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.
Okay, so what does that mean to you?
I always tell business owners who are new to factoring; our clients all have two things in common:
• They all provide a product or service to another business.
• Our clients all have a majority of their customers on payment terms. Meaning, our clients have to wait to be paid for whatever product or service they have provided to their customer.
From this common intersection extend many avenues as no businesses are exactly the same. All have various business challenges, invoicing processes, and diverse customers.
To further explain the definition at the beginning of this blog in real world terms, this is how a typical factoring transaction works:
• ABC Distribution has an invoice for $1,000.00 from their customer;
Widgets R Us.
• ABC Dist submits the $1,000.00 invoice to Crestmark to be factored.
• Crestmark enters the invoice into our accounting software, and advances 80% of the $1,000.00.
• ABC Dist gets $800.00 wired to their bank. The advanced amount is available to our clients the next morning.
• Crestmark keeps the 20% (or $200.00 in our example) in a reserve account for ABC.
• 30 days later Widgets R US pays the $1,000.00. Payment is made payable to ABC and sent to our lockbox. We post the payment and assess a fee for factoring the invoice.
• In a few days time (as long as it takes for Widget’s payment to clear our bank) we release the remaining reserves to our client.
The bottom line result of the above example is;
ABC has the use of $800.00 of the original invoice amount within 24 hours of presentment instead of waiting the 30 days for Widgets to pay. Assuming a 2% fee (insert disclaimer, actual fees vary) for the first 30 day period; the above scenario will net $980.00 of the original $1,000.00 invoice to ABC Dist.
If you would like to speak with us about how factoring may work for your company, please visit our homepage.