Factoring as a financial tool has been around for a long time. In basic terms, it is a transfer of risk. Although many financial experts will use the term factoring synonymously with accounts receivable financing, factoring is different in that it transfers ownership of the accounts receivable.
“Factor” refers to the third party that is purchasing the risk—in these cases, the accounts receivable. Factoring allows a business to ensure consistent cash flow when needed and allows them to keep less cash on hand at any given time.
Factoring is a corporate finance technique that enables a company to either:
With factoring, you can offer your clients credit terms rather than cash up front, without the hit to your cash flow. Even though the client pays with credit, through factoring you have cash flow right away because the factor will give you a cash advance on those accounts receivable.
Factoring and collections agencies are both methods of handling accounts receivable invoices, but they both work very differently. Factoring manages accounts receivable for clients who generally pay on time as per their credit terms. It provides capital to the business backed by the promise of that future client payment. Collections, on the other hand, is an attempt at recovery of unpaid debts by clients who have failed to pay under the credit terms agreed upon. Thus, factoring is appropriate for businesses who have creditworthy clients but who may suffer if they don’t get that payment right away, and collections are for businesses whose clients have failed to pay their bills.
1You submit an invoice/ progress payment on work that has been completed
2The invoice is verified with your client
3Capstone provides immediate funds
4Your client remits payment within their payment terms which is typically 30 to 60 days
5Capstone issues a rebate for the remaining reserve balance, less the factoring fee
Spot Factoring is especially helpful in the area of construction financing. If you are a Contractor or Subcontractor and are going to be working on a large new construction project, you may have a lot of one-time capital needs as you begin work. Spot Factoring can be an excellent solution for you to cover supplier costs or payroll on an as-needed basis. There is no contract or obligation. Once the project is completed you no longer have that gap in cash flow and you don’t have to continue selling your invoices to the third party.
Structured for development-stage companies, discount factoring involves the selling of invoices at an advance amount less a commission. Typically, Capstone purchases each invoice or assignment schedule from the client and then provides a working capital advance each time a schedule of accounts receivable are sold to Capstone. The reserve amount is disbursed to the client after the account debtor pays the amount due under the factored invoices to Capstone. The reserve amount is the difference between the amount paid by your customer and the amount advanced by Capstone, less any commissions earned.
Discount Factoring is ideal if you are going to have an ongoing, consistent need to transfer invoice balances to avoid any lapse in cash flow. This technique uses the accounts receivable assets as collateral. It is used both by new businesses who regularly need to make up for a gap in cash flow, need to offer extended payment terms to secure a contract or for other businesses who use it as a means of more efficient operations and keeping less cash on hand.
Collection Factoring is different from collection agencies; collection factoring is a structured transaction that has two components:
The interest charges run through the date the account debtor pays the invoice and is deducted from the invoice payment along with the commission charged for guaranteeing the creditworthiness of the account debtor. Not every business will be able to take advantage of this type of factoring to cover cash flow. Companies with a positive net worth and profitable operations qualify for this type of factoring.
In cases where credit terms call for a client paying cash later than when that cash is needed by the business, collection factoring is a more cost-effective method than collection agencies.
Factoring can close serious gaps in cash flow and allow you to continue operations without worrying about covering necessary expenses. Not all factoring options are alike, however. We know that every business is unique with its challenges, and each deserves an individualized approach to solving their cash flow shortfalls. With flexible factoring structures, Capstone will customize a program specific to your business that will help achieve your growth goals. By utilizing factoring, you can shift your focus from waiting on cash to working on your next project without the stress of inconsistent cash flow.
Stop running your business job to job, and start reaching your full potential. Speak to Capstone about accelerating your cash flow today!
Please call us at (212) 755-3636.
