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Is Factoring the Answer to Your Debt in This Economy?

What economic conditions will a factor face this year?

According to financial experts, the stock market has doubled in the last three years, and the United States is definitely regaining its 2007 peak economically, even though the country is way behind in the job market. They believe that the economy (retail sales, exports, and industrial production) is actually moving in the right direction. One big negative trend is the housing market, but then again, the housing bubble was quite severe and may take a longer time to get over. They also talk about the fact that we had an economy shrinking at about 6 percent annual rate, as well as the deepest recession—things we have not seen in 80 years.

People panic and wonder what we are going to do for jobs, especially those in real estate or structured finance. We all wonder how we will pay down these debts, but when we review history, it appears as if we’ve been at these junctures many times before. In the 30’s, then again in the 50’s, and, of course, in the 70’s when there were double-digit inflation and high oil costs. The truth is that we have always proved that the U.S. economy is resilient, so a factor will mostly face positive conditions in modern times and assist companies who still experience slow payment on their invoices while their business continues to grow.   

Ultimately, we always find new ways of doing things. One of these new ways is for a small to medium-sized enterprise (SME) to make sure to have a factor in the wings. So, what is this factor we talk of? Still, many SMEs have no clue. By definition, a factor is, “In commerce: Factor (agent), a person who acts for another, notably a mercantile and/or colonial agent.” However, the definition of a financial factor is as follows, “A person or firm that accepts accounts receivable as security for short-term loans.” This latter one is the kind of factor that can assist an SME. In fact, many banks and finance companies offer factoring and receivables financing services in the United States.

The way an SME can really take advantage of a factor is to get set up early in the New Year. Factoring is a financial transaction through which a business sells its accounts receivable—also known as invoices—to a third party (the factor) at a concession in exchange for cash or cash in advance of when the invoice would have otherwise been due. This enables a business to make payroll, pay bills and debt, buy supplies, hire employees, and a myriad of other things that can keep their cash flow going.

In a nutshell, factoring is a survival technique that has been proven to work for more than 4,000 years. When someone needs money fast, they can use factoring to get cash and stay in business, period. Factoring just works!

Invoice factoring rates are always competitive.

Now, there are many factoring companies available, and with these, a number of invoice factoring rates and options available, as well. The following are examples of some of these methods;

Flat Factoring Fee

Some factoring companies use a flat factoring fee. It is also referred to as a fixed fee, which is a flat percentage of the factored invoice amount.

Tiered Factoring Fee

Tiered factoring fee compensates for the days a factored invoice is pending before the factoring company receives the payment.

Administrative Fee with Interest

Another example of invoice factoring rates includes a factoring fee structure which nobody uses anymore. This is because quantifying fees is always a challenge for most laymen. It involves a low flat component or an administrative fee, along with a charge for the usage of the funds, payable with interest, which is usually quoted as a spread over the prime rate.

The advanced funding that an SME receives for their accounts receivables and the discount fees paid are based on the financial strength and creditworthiness of their customers, which is usually quoted as a subsidised rates which vary depending on net monthly factoring amount (volume discount applies)There is no provision for fixing or quoting  factoring rate or fees unless details of said customers, business or invoice amounts to be factored are shared.

You must also be aware that some factoring websites are advertising seemingly low discount invoice factoring rates. These may be trick sites just to get you to call. More often than not, you will not know what fees are expected from you until they have you trapped on the phone.

Fee Structure and Funding

Generally, it will take no more than 24 hours after you send an invoice to be factored for it to be funded at about 70-90 percent. Of course, this all depends on the invoice amount and the business paying the invoice. This is your advanced funding. It will typically be wired to your business bank account.

The factoring fee can range between 2.5 and 3.5 percent per 30 days, and another one percent per day for late payments. As a rule of thumb, fees attached to factoring should be customized to fit the needs of your business, as well as your customer base.

There is no minimum sales volume required by many factoring companies. You use the service only as you need it. Similarly, there are no maximum limits either.  How much can you advance against an invoice?  Some will advance up to 90 percent against invoices you are selling.

How much will it cost? Most professional factoring fees are competitive. Your unique circumstances will have an impact on your fees, and so it is likely to vary from one business to another.

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