Just the other day a funding source received a call from a business owner who was very angry with his bank because the bank declined his loan application even though he has been a customer about ten years and has conducted almost all of his business with this particular bank for the past six years. Throughout those years, during his relationship with the bank, the tellers often asked him if he needed a business loan. Even the branch manager told him on more than one occasion that he could always count on the bank for a loan if he needed it. Well, what happened?

Frankly, this isn't uncommon and the bank isn’t uncharacteristically mean to this particular customer. However, it is no consolation for the business owner who is faced with a considerable growth opportunity, but is insufficiently capitalized.

In the old days, when business owners needed money, they simply went to their local banks or to family and friends. Back then, banks basically granted loans based on a customer’s relationship or on a simple recommendation. Loan rates were generally homogenous from one bank to another regardless of locale. Families and friends lent money based on promises that they will be repaid. Not anymore.

If you have been around at all for any amount of time, not just in business, if you have been following the recent developments in the business community, you no doubt know that banks have stiffened their requirements and lending rates now varies significantly from one bank to another. In addition, people are not as liberal as they once were with money, in no small part due to a fledgling economy, increasing delinquencies, and corporate shenanigans.

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Today, there are literally thousands of factors, from general factors to specialized niche market financiers
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Nevertheless, all is not lost. In fact, it is a mixed blessing because much has been gained as a result. Individuals and businesses have become more responsible and more cautious about going into debt. They still receive funding albeit through alternative means and sometimes, in conjunction with other bank financing. One such alternative is accounts receivable funding also known as factoring.

Factoring is the sale of accounts receivable at a discount. It is a method of financing used by businesses to raise capital quickly and improve cash flow with less consideration for individual credit and without creating debt. A business owner who under conventional criteria would be ineligible for a bank loan might still qualify for funding with a factor. Factoring is more flexible and readily available than conventional lending.

A Factor is an individual or business that is engaged in the buying of accounts receivable at a discount. Inherent in the factoring process is the ability of the factor to take more risks. It may surprise you to know that factoring is not a recent phenomenon. It dates back centuries, and was the dominant form of commercial finance in the American colonies. Nonetheless, recent factoring practices and developments in earnest began in the textile industries of the 1930s and have grown since then to include virtually all industries.

Today, there are literally thousands of factors, from general factors to specialized niche market financiers. Recently, even banks and other cash rich corporations are increasingly participating in the factoring trade in an effort to acquire some share of the growing factoring market. Factoring brokers have joined the field as well.

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Do not simply select a factor that is over-easy because it could be sign of problems in the company itself and an indication of how they handle everything else
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Most of the major factoring companies are either wholly owned or subsidiaries of banks. Factoring brokers are individuals or businesses that match clients with funding sources.

As a result of the Internet, where a business is physically located is not as materially important as it once was. A business can be funded, regardless of location.

What if you are considering or have already decided to factor your accounts receivables, how in blaze’s name with so many available choices, do you choose a factor that can best meet your needs, one that understands and will complement your business, one that you can grow with?

In its simplest form, there is a three-stage process to a factoring relationship thus: the stage before an account is established, during the relationship, and after the account is closed. Each stage should be as trouble-free as possible. Although not exactly in the order presented, the following are some basic questions to ask prospective factors:

• What are the requirements and how do you apply?.
• Is there an application or set up fee?
• Are there any geographic restrictions?
• Does the factor work with businesses in your specific industry, with similar characteristics, years in business, capital requirements, and so on?
• Will you be required to commit to a term contract, if so, for what period?
• What is the collateral requirement?
• Do they do recourse, non-recourse, both, and or other types of factoring?
• How long have they been in business?
• Can they furnish references?
• How long will it take to set up an account?
• Is there a volume requirement? If so, what is the minimum and maximum?
• What are their rates and fees?
• Would you have an option to pick and choose which invoices to factor or would you be required to factor all invoices?
• Will your customers be contacted? If so, how and when?
• Are there any other fees such as for service, due-diligence, account maintenance, field audits and so on?
• When you factor an invoice, how much is paid out to you?
• When are you paid?
• How are you paid?
• How will you know when your customer pays an invoice?
• Will you have direct access via telephone or Internet to your account information?
• If there is a balance, when is it settled?
• What happens if an invoice is not paid?
• How flexible is the factor, and besides buying accounts receivables, what other ancillary services do they provide?
• What are the conditions for terminating an account?
• What must happen after an account is closed?

The application process should be simple and easy. You should not have to complete an inordinate amount of paperwork and be required to provide enormous support documents, as you would with a bank loan. Typically, factoring applications are between 1 and 4 pages long. Most factors would require some sort of support documents to provide evidence of your business registration, ownership, sales, and to declare that your accounts receivable is not pledged or encumbered in any way to prevent it from being assigned.

Before you apply with a factor, you should know what their fees are. Granted, most factors may not be able to give you a contractually binding quote without having specific information called for on an application, but they can at least give you general rates. They should openly inform you of any upfront fees such as an application or set up fee.

Some factors only work with businesses in particular industries and in specific geographical locations. You need to know if the factor you are considering works within your industry and with companies of your characteristics such as years in business, history, status etc.

Because of improved systems of communication and transport, majority of factoring transactions today are conducted via the Internet, telephone, and mail systems, with almost no physical contacts. Therefore, where a company is located may not be materially relevant in entering into a factoring relationship, especially if it is within the same national boundary.

You should be wary of a factor that only deals with businesses that are within its immediate market area because he may not be sophisticated enough to deal with businesses outside its locale and similar criteria may apply in relation to your customers, thus limiting your factoring benefits and ability to grow.

If you are like most businesses, you probably want to factor because of a temporary or short-term cash flow need. Therefore, you would want to know the specific term requirements and the conditions for terminating an agreement.

In a typical factoring agreement, the only collateral required is the accounts receivable that is purchased. However, factors usually secure their interests with blanket liens placed against all receivables owned by a client because accounts receivables are simply looked at as one aspect of a business asset. In some cases, a client may be required to sign a personal guarantee against non-payment and in promise not to commit fraud.

There are two major types of factoring – Recourse and non-recourse. Recourse factoring requires a personal re-purchase guarantee by the seller, who is ultimately responsible for unpaid, disputed, and fraudulent invoices. With non-recourse factoring, the factor assumes total risks provided the intended payer does not dispute the validity of the invoice. Regardless of what type of factoring, all agreements require a principal’s guarantee against committing fraud.

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Would you entrust your accounts receivable management, your customers, and in essence your business to a company whose processes are prehistoric?
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Longevity has its advantages. You should want to deal with a company that is stable, has been in business for a reasonable length of time, and is willing to furnish verifiable references if requested.

As with almost any service today, speed and convenience has become the order of things. Therefore, how long it will take to set up an account should be of primary importance. Speed will be even more critical as to when you actually receive the funds you need and how. In raising capital for commercial purposes, it can take up to nine months such as in IPO offerings to receive initial funds and as little as a few hours with factoring. You should beware of offers for immediate funding that do not point out the time it might take before your account is approved and actually funded.

What good is a line of credit if you can’t access the funds when you need it, and if it won’t meet your needs? None! You must ascertain what the minimum and maximum limits are and if it will serve your purpose. Most astute business managers use factoring for urgent funding needs and as a back up financing during times of rapid growth, development, or cash shortages.

Obviously, your invoices will be discounted based on the number of days they are outstanding. Beyond that, you should establish how much you will receive at initial funding and when you should expect to receive it. You should also establish how your funds will be disbursed, by wire transfer, check, or other methods?

Other than the auxiliary fees, actual costs of bank loans are typically calculated as interest on an annual basis. With factoring this is not so. Factoring fees are calculated as a discount off the face value of each invoice and for a much shorter time than a year, typically in days. In addition, there may be other fees such as for service, due-diligence, account maintenance, and so on. It will be wise to have all fees spelled out.

As you already know, factoring is the sale of accounts receivable at a discount. It is not an avenue to dispose of bad debts. Consequently, factors only buy valid and collectible invoices. It does not mean that you must sell all your accounts receivables because you sign an agreement to factor. However, a factor may make such stipulation, and you have an option not to accept it. You should be able to pick and choose which invoices to sell. You should not use factoring as a hands-off substitute to managing your receivables.

How would a factor validate an invoice? Would they contact your customers? If so, how and when? It is particularly important to have clear answers because by allowing a factor to contact your customers, you are in essence giving them permission and access to speak to your customers on your behalf. How they treat your customers will be directly reflected on you. You should at least have a basic idea of how they work and prepare your customers on what to expect. That way, you will make the process go much smoothly. Of course, your customers may already be familiar with factoring since most major businesses are.

With today’s advance technology, even in banking, customers are increasingly able to monitor account activities via the Internet and telephone. Similarly, majority of factoring transactions are conducted this way. It is an irreversible trend and businesses almost have only one choice in the matter --to modernize or be extinct. Is the factor you are considering up to date with modern technology? Do they give access to timely account information or would you simply be the type of customer that is willing to wait for whenever the information gets to you. Wouldn’t you like to get information in a timely manner about what time your customer pays an invoice, especially since your discount rate depends on it? Wouldn’t you want to know in a timely manner if an invoice is paid short and if there is a balance due, when it will be paid? Of course, the answer is obvious.

One of the benefits of factoring is the ability to receive immediate cash for invoices. It is like selling on credit but getting paid C.O.D (Cash On Delivery). However, there is also the possibility that an invoice may go unpaid. What happens then, if an invoice is not paid? Who bears the burden? At what time is an invoice considered past due? Is the factor of your choice flexible? Other than buying of accounts receivables, what other ancillary services do they provide? Would they advise you on accounts receivable management, credit risks etc?

Unlike establishing a bank account, most factoring accounts are intended to be short term. A factoring account must be mutually beneficial or more accurately, it should benefit you. Therefore, you should estimate how long you intend to maintain a factoring account. You should also establish and understand the required conditions that must be met or breached in order to terminate an account. What form of notice is required and how must it be delivered to consider it communicated.

You should ask these questions. You shouldn’t select a factor simply because they are local, the first one you found, or because their processes are over-easy. Too easy or too difficult can both be problematic and indications of how a company handles everything else. There should be a satisfactory medium. You should not entrust your accounts receivable management, your customers, and in essence, your business to a company whose processes are prehistoric or irresponsible.

Although I have made all effort to include all possible questions pertaining to the process to select a factor, you should not use the questions or answers as a substitute for competent legal counsel or other expert assistance. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.

Selecting a factor would require some research to find the right one for your business. Typically, it can take between one and fourteen days to establish a factoring account. You should allow sufficient time to make inquiries and undergo the application process. Unless you have had prior factoring experience and or are willing and able to do the necessary research, it is strongly recommended that you employ the services of a trained broker or other qualified intermediary to evaluate potential funding sources.