Invoice Factoring

Spot Factoring: What It Is and How It Works?

Factoring financing has been around as a business technique for a long time. In basic terms, it is a transfer of risk. Although many financial experts will use the term factor financing synonymously with accounts receivable financing, factoring is different in that it actually transfers ownership of those accounts receivable. With accounts receivable, there is no ownership transfer, only risk transfer. The “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:

  • Transfer the credit risk of its accounts receivable to a third party and / or;
  • Leverage its accounts receivable to accelerate its working capital through the sale of its accounts receivable to a third party.

Through factoring, you can allow clients to pay with credit rather than cash up front, without hindering your business in the meantime. Even though the client pays with credit, through factoring you have cash flow right away because that credit risk is now transferred the buyer.

Factoring

Factoring Vs. Collections

Factor financing and collections agencies are both methods of handling accounts receivable invoices, but they both work very differently. It is crucial for a business owner to understand the difference between these two terms. Factoring manages accounts receivable for clients who generally pay on time on 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 meet 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.

Single Invoice Factoring (Spot Factoring)

  • Ideal solution for firms or start-ups simply in need of immediate cash
  • Does not require a multi-year contract
  • Provides the company with the flexibility of selling invoices to Capstone, only when working capital is needed
  • No obligation to sell a minimum number of invoices per year or over the term of a contract

Single Invoice or Spot Factoring is especially helpful also 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. Single Invoice Factoring can be an excellent solution for you to cover supplier costs or payroll on an as-is needed basis. There is no contract or obligation. Once the big project is completed you no longer have that gap in cash flow, you don’t have to continue selling your invoices to to the third party.


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Discount Factoring

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 pays out a working capital advance each time a schedule of accounts receivable is 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 account is the difference between the amount paid 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 in order to avoid any lapse in cash flow. This technique uses the accounts receivable assets as collateral. It is used both by new businesses who consistently have a need to make up for a gap in cash flow or for other businesses who use it as a means of more efficient operations and keeping less cash on hand.

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Collection Factoring

Collection Factoring is different from collection agencies, which is discussed above. More commonly known as Factoring, collection factoring is a structured transaction has two components.

A factoring commission is charged against the face value of the invoice amount in exchange for Capstone taking on the credit risk on the accounts receivable

 

An interest rate is charged against the advance if one is requested.

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.

Using the method of factoring can close serious gaps in cash flow and allow you to continue operations without worrying about covering certain expenses. Not all factoring options are alike, however. We know that every business is unique with its own problems, and each deserves an individualized approach to solving their cash flow problems.  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 an 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 email us at info@capstonetrade.com or call us at 212-755-3636.

CALL TODAY TO START ACCELERATING YOUR CASH FLOW.