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Factoring 101 for the cash slow
Factoring - Financial ServicesFactoring Receivables - Excellent Alternative to Traditional Bank Financing | Factoring - How does it work? | 10-31-2005
| For many years the Factoring industry had been providing a basic financial service to multi-billion dollar corporations. Over the past twenty years factoring has increased its support of small to mid-sized businesses, growing to an annual volume of over $200 billion in commercial invoices being factored at the turn of the new century. Factoring has become a staple financial service and an excellent alternative to traditional bank financing.
The factor (factoring company) advances working capital to small businesses (client) in exchange the client sells, assigns and transfers its accounts receivable to the factor at a discount from face value. The factor notifies the client's customer (account debtor), which owes the money represented by the invoices, that the invoices have, in fact, been sold and assigned to the factor and are payable to the factor and not to the client. The factor also files a UCC-1 Financing Statement, a form setting forth the parties and a general description of the collateral. Typically the UCC-1 will cover “All Assets”. The financing statement will be filed in the office of the Secretary of State of the companies’ state of incorporation in order to protect the factor against any third parties who may also claim to have a security interest in the same collateral. This is set forth in Revised Article 9 (RA9) of the Uniform Commercial Code (UCC).
Factoring is an excellent way for small growth businesses to manage their cash flow. Most small businesses sell their goods and/or services to a larger businesses or government agencies, which typically require their small vendors to submit invoices for payment bearing terms such as Net-30 days or longer. This extension of payment terms by small busines provides financing to their large business or governmental agency customers. This extension of terms aggravates the small businesses cash flow. Almost all small business owners want to grow and prosper, however very few will have the necessary investment of working capital to support increased demands for the companies goods or services. Factoring can provide the necessary working capital to assist a company in reaching its goals. |
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