Commercial Factoring: A Few Essential Factors

Sterling Commercial Credit Commercial Factoring

November 2014

When businesses, no matter what size they are of, are in need of fund, the commonest option for them today is commercial factoring. Small, medium and even large companies prefer factoring to bank loans. One prime reason is that commercial factoring helps you get cash in less than 24 hours, while banks will take a considerably long time, if at all they sanction the loan, which they do not do on most occasions.

If you are wondering under what circumstances you should or may go for commercial factoring, check out the following conditions.

Under what circumstances should you choose commercial factoring?

If you have a project or an order at hand but not the money to get the work done or invest on the raw materials you need to develop the products, you can go for commercial factoring services. It is essential to have a project or an order at hand to be qualified for a factoring service. If you do not have a project or an order, the concept of invoice is not valid, and you cannot qualify for a factoring service without an invoice.

Commercial factoring is a wise choice if you need money instantly. A bank loan may often seem to be a more reliable option to you. But, think of the possible circumstances when you opt for a bank loan. First, the bank may not approve the loan, no matter how long a relationship your business shares with the bank. Second, even if the bank considers you to be qualified for the loan, the process will be so time-consuming that you cannot afford to wait over 2 months. On the other hand, the factors are able to fund loans in under 10-days. The advantage of getting services form a factor is that you gain a financial partner that will be in your network weekly. A factor is an extension of your accounting department.

Things to Consider

How much to fund? Many factors require monthly minimums or charge you a fee for their service. Be sure to hire a firm that will not charge you a monthly minimum nor will they trap you into a one or two year contract. Several competitors will trick you with a teaser rate then have so many add on fees that the cost is 2x to 3x higher than a more credible firm. The funding amount should be managed week to week based on your asset conversion cycle. Simple management of A/R aging and A/P aging is the key to any cash flow manager.

Should you tell your customer about the factor? When you go for an invoice factoring service, your client will be aware of the involvement of the factor. The factor is going to collect the payment as scheduled in the terms of your purchase order. SCC will either notify your client via email or certified mail based on the volume of customers. It’s imperative to introduce SCC’s service and introduce the SCC team member as an extension of your accounting department. Your client is going to make the payment to the factor, since it is their responsibility to collect the payment from your customer.

Choosing a Factor: When you choose a factor, you have to make sure that you are selecting a financial partner. Not all factors are created equally. Interview them as if you are interviewing a CPA, Attorney, or Accounting team member. Having access to a partner is critical and understanding how they access their working capital is important when comparing firms. You often get what you pay for so don’t simply make a decision based on the lowest rate as many of these offers are brokers with outsourced services. Hire the firm that meets are your requirements and will follow through with simplified reporting and has superior communication skills. With cash flow being the heartbeat of your business make sure you hire a Sterling factoring partnership.