Factoring Company

A Factoring company is a financial organization that will finance the receivables of businesses that need to accelerate payments for merchandise that has been sold to customers but not yet received. The factoring companies take total control of the accounts receivable and cannot look back to the customer if some of the invoices are not paid. After the factor buys the receivables, the seller's customers can be notified to remit the payment to the factor, or the customer will manage the receivables and periodically remit the receipts to the factor. There are drawbacks to this kind of financing which can be done two ways.

Maturity Factoring

•Under this type of arrangement, the factor will take over the entire process of issuing credit and the collection of accounts and send the seller the amount of receivables based on the average date they are due. The factor will perform this service for a fee that ranges from ¾ of 1% to 2%. Of course, that arrangement is predicated on the projected loss ratio of the book of receivables assumed by the factor.

Discount Factoring

•The selling company will transmit the receivables to the factor and will, in turn, receive payment for them based on their average due date. That amount will be reduced by such things as returned merchandise, the cash discount for early payment, and claims that may arise from the debts. The factor will charge an interest rate based on the average daily balances of 2%-3% over the prime rate.

"Over-advances"

•Companies that typically do most of their business in a particular time of year, or periodically must meet the high inventory demands of customers (like the garment industry), are accommodated with so-called "over-advances." This is a special concession that a factor will make after thoroughly reviewing the history of the client company.

Is Factoring A Smart Idea?

•Companies with high inventories and receivables need to invest that money more quickly than if they wait to receive it. However factoring is a very expensive method of financing and the client will lose significant control over its book of receivables.