When invoice financing or factoring appears to be the best means of generating quick cash to keep a business going, company officials are faced with the task of finding the right factoring agency to do the job. While all factoring agencies provide the service of effectively buying the current accounts receivable of a business and providing a business with the face value of those invoices up front, there is some difference in the terms and conditions applied by different providers. This means that before signing with any factoring agency, it is important to assess the program in terms of how much money is advanced on the front end, the amount that is kept as factoring fees for the service, and what it takes to terminate the relationship once the business no longer needs to factor its invoices to stay afloat.
In general, a factoring agency will evaluate, approve, and purchase a batch of invoices related to a specific billing period. Once purchased, most agencies will provide an up-front disbursement that is somewhere between 80% and 90% of the total face value of the invoices. The goal is to identify factoring services that offer a higher up front disbursement, allowing the company to make better use of the cash flow on the front end.
Another consideration is how much the factoring agency keeps for the factoring fees. Typically, this is also a percentage of the face value of the invoices factored. The fees may be anywhere between 3% and 6%. Once all or most of the invoices in a given batch are paid in full by the debtor’s customers, any remaining balance after the up front disbursement and the fees are accounted for is forwarded to the debtor. The idea is to combine the best possible up front payment with the lowest factoring fees possible, a move that allows the company to eventually reap the greatest amount of return from the invoices while still having the most funds up front for use in handling pending debts and operating the business.
One element that is often overlooked when evaluating a factoring agency is what the debtor must do in order to end the factoring relationship. Typically, this will involve notifying the factoring partner at least thirty days in advance, and will also involve buying back any of the purchased invoices that have not yet been settled. In some cases, the factoring agency will allow the relationship to be terminated if the total value of any remaining invoices is under a certain amount, and if the debtor agrees to buy back those invoices within 90 days of the agreement termination, if payments from the debtor’s customers are not received in the interim. Here, the goal is to obtain the most liberal terms for ending the factoring relationship while still enjoying the best disbursement plan and lowest factoring fees possible.
