Factoring - Quick Facts and Advice

With factoring there is no loan and no debt to repay; it is a financing strategy.

Many people might consider accounts receivable (AR) financing as an expensive funding option. Actually, it is more than funding, and involves the opportunity cost of your own time. Factoring is a significant servicing function that relieves a business of considerable administrative costs and reduces bad debt losses. We believe the administrative savings alone justify its cost.

Factoring: How it Works

Pricing practices vary among different companies offering AR financing. A discount rate is usually quoted as an initial amount, and then another rate for subsequent time periods.

It is important to identify all the fees that will be charged. Sometimes, the discount rate represents a funding rate, and there is an additional servicing fee that may not be completely understood initially. Again, make sure you look at all the fees and calculate the true cost before you commit to any arrangement.

Typical Clients Who Use Factoring

We think we're speaking clearly, but sometimes we use words that may sound foreign to you. In order to maintain clear communication, here are a few words from the financing glossary you should know:

1) Advance Rate:

This is the percentage of the invoice amount that will be advanced to the client up front. Typically, this rate is around 75-80%. Some factors advance 90-95%, but take a cash reserve from the advance or hold or limit reserve disbursements through the month, effectively advancing 80% or even less. Make sure you understand how the money to be funded up front is calculated.

2) Chargeback:

A chargeback occurs when a factor has funded an invoice and it is later determined that part or all of the invoice amount is in error and will not be remitted before a predetermined period or at all. This could result, for example, from defective product being delivered, aging invoices or disputes. The factor charges this back to the client. Some factors charge an additional fee for this, it is important to understand these fees up front.

3) Discount:

This is expressed as a percentage of the invoice amount and represents the amount the factor keeps as a fee. Again, the use of this term varies. Some factors quote an "all in" rate that includes servicing and funding. Some factors quote a funding rate, but there is also a servicing fee or other costs. Liquid Capital always quotes one rate, there are no hidden fees.

4) Reserve:

This is the amount, expressed as a percentage of the invoice amount, that a factor holds as a reserve until the invoice is paid. The factor pays the reserve amount, less their fees, when the invoice is collected. It is important to know when that gets paid. Some factors hold all reserves until the end of the month when they release them. Other factors, such as Liquid Capital, release reserves at least weekly.

5) Spot Factoring:

With traditional or full factoring, all of a customer's invoices are factored on a continuous basis. Whereas spot factoring is the factoring of an invoice or group of invoices on a one-time basis.

10 Reasons to Factor with Liquid Capital

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Benefits of Factoring