Factoring is a straightforward form of asset-based lending. However, the fee structures and program details can be confusing to the business owner.
In considering a factoring proposal, it is important to understand the following aspects.
#1: Recourse
Recourse occurs when an invoice is deemed uncollectable for any reason or has aged out of the receivable portfolio. The Factor will need to recover any advance and fees from the client;this is often handled smoothly and easily from reserves. It’s important to understand the Recourse policy and how it will be handled if/when necessary.
#2: Notification
Notification is the legal notice to the client’s customer that the invoices have been assigned to the Factor and that all payments will be coming to the Factor until a release is issued. As this step involves communication with the client’s customer, it is important to understand the process, the language, and work with the Factor to ensure success
#3: Hold back reserve
Hold back reserve is the amount in reserve held for any potential issues with invoices. This is often released on a specific date, after all collections have been posted and the account is reconciled. It’s important to know how much is held in reserves and how often it will be released.
#4: Collection services
Collection services vary greatly based on the needs of the client. Some clients will benefit from an active collections effort while others may utilize portals and automatic payments. This can be customized and Is a valuable component to a successful factoring relationship resulting in improved invoice turnover.
#5: Credit evaluations
Credit evaluations are completed by the Factor when they asses the credit quality of the client’s customers. The Factor can share this information with the client to help them make educated decisions on credit risk and setting appropriate terms with their sales force. This is a valuable tool and can be a nice benefit of working with a Factoring firm.
#6: Fee structure
Lastly, knowing and understanding the fee structure often results in significant savings while taking advantage of the receivable management services results in increased sales and reduced operating costs. Often times, the Factor can and will provide an easy-to-follow example to give the borrower a clear understanding of the fees.