Factoring fees are fundamentally different from interest rates. Factoring amounts to a discounted purchase of an invoice (or a package of invoices). This means that the fee the factor takes will be based on the face value of the invoices for which the factor provided funding.

For example, if a Factor offers a 3% rate, then a $1,000 invoice will be funded for a $30 fee. This $30 fee is paid when the invoice is paid by the debtor.

However the fee can change based on how long the invoice has been outstanding. Usually a factor’s fees will increase at set mile stones. When the aging report shows an invoice past 45 days, 60 days, 75 days etc. the factor will add a predetermined percentage, usually below 1%, on to the 3% base rate.

This fee structure means that the factor will not know what fee will be charged on any given invoice until it is paid. This is why factors only advance a percentage of the invoice, usually between 70-90%, and hold the remaining percentage as ‘reserve.’ This reserve will paid back to the client, minus factoring fees, once the invoice is paid by the debtor.

This is in contrast to traditional interest chargers that accrue daily, and might be simple interest or compounding interest. As well, loans might be interest only or amortizing. Click here for more differences between factoring and traditional loans.

Factoring Fees: Different from Interest Rates is a post from: Factor Direct Capital

Here are a few examples of businesses that would likely be turned down by a bank but would be a great candidate for factoring:

- A highly leveraged importer that sells to large retailers.

- A start-up Recovery agent that does jobs for large auto-finance companies.

- A small landscape company that won a contract to maintain a large commercial property.

In the current lending environment, these businesses would be hard pressed to receive a bank loan. However these businesses would be able to get the working capital they need to continue or expand operations through factoring. So, how come the banks won’t deal with a company but factors will?

To answer this question we must look at the difference between the two types of lenders. Banks provide funding by issuing debt that is to be paid by their client. Factors provide cash through the sale of an asset; they buy existing debt from their client that is to be paid by their client’s customer. All finance companies are primarily concerned with the credit of the parties that are obligated to pay them. This means that banks are going to look at your business’s credit, and factors are going to primarily focus on the credit of your customers. This allows the businesses listed above to receive funding based on companies that are far more credit worthy than themselves.

Another key benefit of Factoring is highlighted by the example of the highly leveraged importer. Banks are likely to turn down a loan application from a business that is highly leveraged, regardless of that business’s credit, because they already have a great deal of debt on their books and are thus viewed as risky. Factoring is an “off the balance-sheet” transaction, as it creates no new debt. This is good for companies that are looking to get a bank loan and want to clean up their financials but still need working capital. It’s also good for businesses that are already highly leveraged and just need that last extra bit of financing to get them to the next level.

Leverage your customer’s credit is a post from: Factor Direct Capital

Myth #1

The most widely accepted myth is that factoring is too expensive. There is some truth to that statement; 2 to 6% over 30 days is a lot. However, there are many ways to offset this cost. Using the funds to complete deals that otherwise would have not been financially possible is the best use of factoring funds. In this case you are increasing your profits as a direct result of factoring. If your business is already at capacity and cannot take on new sales, it means your business needs to grow. Factoring is ideal for growing companies as it provides flexible financing that grows with your business. Factoring funds can be used to purchase new equipment, hire new employees or open a new location, all of which can increase your long term profits. Factoring can also allow you to take advantage of volume and/or early payment discounts which can affectively off set the factoring fees. Bottom line is when factoring funds can be put to good use, it is expensive not to factor.

Myth #2

Another widely held misconception is that factoring is the lender of last resort. While it is true that factoring can be an affective way to get money in emergency situations, it is hardly the only use for factoring funds or the only reason why factoring would be used. A factoring arrangement is a way for businesses to get financing without assuming debt. This means when a loan is actually needed, the books are clean of debt, making them look less risky to banks and improving their chances to get approved. As well, the business might not want to have the fixed debt service that a traditional loan requires, and turn to factoring as a way to avoid that constant expense. A small business might also look at the added benefits in terms of collections and accounting as a way to outsource key operations. Point being, there are many other reasons to use a factor besides being in a cash flow crisis, which means factoring is not solely a lender of last resort.

Myth #3

The next myth is that factoring invoices will make your company look weak to your customers. This myth stems from previous myth so its basis is already disproved but let’s take it a step further. As described above, factoring is perfect for growing companies; therefore factoring might be a sign of growth, not weakness. Further, factoring is used in some industries such as manufacturing, distributing, apparel & textile, trucking, and temporary staffing, no matter how big the business gets. Suppliers of huge retailers like Costco, Target, and Walmart regularly factor invoices as well. An assumption that a company is in bad financial shape simply because they are factoring invoices is an irresponsible assumption to make.

Myth # 4

The last myth is that a factor will be too aggressive in collections and ruin your relationship with your customer. Ask yourself, why would a factor ever want to do that? First of all, it’s more work for them to hound your customer for payment. Second, it’s in the factors best interest that your business makes as many sales as possible; ruining customer relationships is a huge step backward. Also, how many clients do you think a factoring company will keep if that is their standard procedure? The reality is that the factor will be very respectful of the relationship you have built with your customers. The factor will work hand in hand with their clients to resolve all issues in a manner that works best for everyone involved. Ruining your hard earned customer relationship is not on the agenda.

The 4 Myths about factoring is a post from: Factor Direct Capital

To increase small businesses access to loans a $30 billion “Small Business Lending Fund” (SBLF) will be created. Access to this fund will be limited to banks with less then $1 billion in assets as to target smaller community banks that are a staple of small businesses lending. The funds will given to banks with a sliding scale interest rate that gets lower as small business lending is increased compared to previous years. For example, if a bank were to increase their small business lending 10% or more compared to 2009 numbers, the rate they would pay for the SBLF funds would be 1%; if small business lending stayed the level the rate would be 9%.

The initiative also provides incentive for states to continue and build upon their successful and innovative small business programs. It would allow states to use federal funds for these programs that might otherwise be on the copping block because of states budgets.

This initiative also has a few tax incentives that may help keep some businesses afloat as well as spur investment in small business. The first of which is eliminating capital gains taxes on small business investments. As well changes to the tax code that allow small businesses to immediately write off qualified capital investments. Further a provision will accelerate the rate at which depreciation on plants and equipment can be deducted.

The last provision in the initiative is the enhancement of SBA programs which should provide increased access to capital. To accomplish this, the maximum size of various types of SBA loans will be increased; more than doubled for most types of loans. This applies specifically to the 7(a), 504, and SBA express loans. Within this provision there is a section addressing the need to assist in the refinancing of commercial real estate that might otherwise be in danger of foreclosure or liquidation. This is available only to “owner occupied commercial real estate,” in other words, small businesses owner that own the space they run their business out in.

Keep an eye out to see if this initiative gets passed. It has the potential to provide much needed help for small businesses. We will keep you updated.

Obama’s Small Business Lending Initiative is a post from: Factor Direct Capital