Factoring Definition

The act of factoring

The act of factoring is when a business sells an invoice to a third party (a factor). A corporation must decide on a factor at some time, especially when it must satisfy requirements for working capital and commitments like paying employees and paying bills (Hancock, Bazley & Robinson, 2015; Entrepreneurial Finance, 2017).

Lack of sufficient financial resources

Lack of sufficient financial resources to satisfy obligations when they become due occurs when a business has provided goods and services to a customer and must wait a long time to get reimbursed, such as 30 to 60 days (Entrepreneurial Finance, 2017). Factoring is designed to relieve the company the frustrations of not having a steady cash flow. Conversely, factoring can also be utilized when a business has taken an extremely large order and is not in a position to fulfill it because of lack of the required capital on hand so factors cover up the costs (Hancock, Bazley & Robinson, 2015).

The Factoring Process

I will use Linda as a pen name. Linda sells clothing, footwear, accessories, and makeup in her fashion house. In March, she got a large order and as a result, made purchases worth $30,000, which she sold for $45,000 so she made a profit of $15,000. However, Linda has to wait for 60 days for payment, which means that she has no income for two months. At this point, factoring finance becomes necessary for her business. A factor would advance her up to 80% of her invoice value within 24 hours. Linda now has $ 36,000, which is enough working capital to buy new stock as she waits for her invoice to be paid. When the debtor finally pays the invoice, the factor will give Linda back the 20% less any fees. Linda has enough capital on hand to meet expenses and achieve her financial goals.

Institutions Offering Factoring Services

Factoring is important to all kinds of businesses ranging from top-of-the-range fortune 500 companies to small businesses. For that reason, many businesses ready to lend out money against accounts receivables (factors) have sprang up. This section shall analyze two factoring businesses (factors) offering the services in the United States. Further, the study shall analyze the factors’ business sectors as well as the advantages of the mode of business to the factors and their clients.

Paragon Financial Group

Paragon Finance has been operational since 1994. The company offers up to 95% of invoices for enterprises willing to pay their startup and usage fees of at least 1% per invoice (Paragon Financial Group, 2013). Other businesses may pay more fees based on their needs and credit situation. However, the company specializes in working with companies that have past tax-related problems and struggle to get funding using other methods. Paragon approves potential firms within 24 hours of application and provides further support & financial advice via telephone, email, and live chat support (Paragon Financial Group, 2013). Paragon Financial Group offers factoring services to the automotive, energy, food, government contracts, healthcare, manufacturing, steel, technology, transportation, and retail sectors (Paragon Financial Group, 2013).

Riviera Finance

Riviera Finance is among the top invoice factoring companies with services across the U.S. and Canada (Calgary and Toronto). The company has financed businesses for the past four decades (Riviera Finance, 2017). Riviera offers simple and flexible funding within 24 hours of verification. Riviera Finance can fund close to 95% of the invoice after the receiving company has proper paperwork submitted (Riviera Finance, 2017). The company offers credit services, non-recourse factoring, and receivables management as well. Businesses willing to participate in all the mentioned services will receive the entire package intertwined to their financial needs. Riviera finance serves clients in the trucking, temporary staffing, oil & gas, and small businesses (Riviera Finance, 2017).

Advantages of Factoring to the Client

According to Banerjee (2015), factoring enhances a business’s cashflow. It gives an organization instant cash to pay customers, payroll, and bills. Ruddy, Mills, Davidson & Salinger (2006) assert that it allows the business to have a comprehensive understanding of its customer’s financial strength. A factoring company does an in-depth credit check to ensure that a particular company that the business is using can pay its debt.

Disadvantages of Factoring to the Client

The cost involved in factoring in factoring invoices can be significant. A business can pay 1.5% - 5% for each invoice to factoring companies, in terms of financing charges, commissions & fees and this absorbs some of the profit making it expensive (Shim & Siegel, 2008). Further, customers may prefer dealing directly with the business than having factoring companies come in between.

Advantages of Factoring to the Factor

The factoring business is profitable. Recourse factoring allows the factor to collect the debt from the business when the business’s customer fails to pay (Banerjee, 2015).

Disadvantages of Factoring to the Factor

Non-recourse factors may lose their money when the customer fails to pay the debt and this might lead to a loss. Further, the mode of debt collection can either build or destroy a factor’s reputation and this leads to loss of business. Firms need companies that will not obliterate their relationship with customers (Entrepreneurial Finance. (2017).

Conclusion

Factoring is a good way to start especially when a business needs to stabilize its cashflows. Though it is a short-term solution, businesses can immensely benefit from it. However, firms intending to use this mode of financing should conduct a due diligence of the factor they intend. Good factoring companies will treat the customer well and hence the business will retain a good relationship with its clients.

References

Banerjee, B. (2015). Fundamentals of financial management. Delhi: PHI Learning Private Limited.

Entrepreneurial Finance. (2017). Place of publication not identified: CENGAGE LEARNING CUSTOM P.

Hancock, P., Bazley, M. & Robinson, P. (2015). Contemporary accounting : a strategic approach for users. South Melbourne, Victoria: Cengage Learning Australia.

Paragon Financial Group.(2013). Company Overview. Retrieved from https://www.paragonfinancial.net/

Riviera Finance. (2017). Our Services. Retrieved from https://www.rivierafinance.com/our-services/

Ruddy, N., Mills, S., Davidson, N. & Salinger, F. (2006). Salinger on factoring. London: Sweet & Maxwell.

Shim, J. & Siegel, J. (2008). Financial management. Hauppauge, N.Y: Barron’s Educational Series.