In simple terms it is the selling of your company’s accounts receivables, for a transport company that means your freight notes / invoices (debtors) to a third party (a cash flow factoring Company), so that you get paid now instead of waiting the usual 30, 60 or even 90 days to get YOUR money.
The funding is provided at a discount and usually available as soon as the Customer confirms the invoice is correct.
The amount advanced is a percentage of the approved invoice and will change depending on the Factoring company, the Customer and how credit worth they are and also your business history.
As a general rule the advance against the invoice is about 80% of the invoice.
What makes a business suitable for factoring?
- It is best if there are more than just a few customers.
- It is best if no single customer accounts for more than about a third of turnover.There can be exceptions to and sometimes with a very strong customer a Factor will do a single customer.
- Customers accept the payment terms the Client has agreed.
- Customers accept a reasonable payment time and will verify the invoice is correct.
What makes a business unsuitable for factoring?
- The business sells to Consumers (Mum’s and Dad’s). Factoring is only available for sales to business customers.
- Lots of small invoices. If you have hundreds or thousands of $20 invoices it won’t work.
- Too many disputes disapproval queries or non payments.
- The business is not sound, reputable and trustworthy.
- Customers make part payments or progress payments.
Recourse factoring and non-recourse factoring
In recourse factoring, the cash flow factoring does not risk bad debts. Put another way, the factor will be able to reclaim their money from you if the customer does not pay. The factoring agreement will specify how many days after the due date for payment you must refund the advance.
Recourse factoring is cheaper than non-recourse factoring, and may have fewer requirements concerning your customers and your systems. This is because you are taking the bad debt risk.
In non recourse factoring the Factoring company takes the risk of non payment. Because of this the cost of non-recourse factoring is much higher and usually Clients don’t want to pay the extra cost. Non -Recourse factoring is rare.