INVOICE FACTORING / ACCOUNTS RECEIVALBES FINANCING
Invoice Factoring and Accounts Receivable Financing takes several forms depending on the structure of the loan facility that the finance company or bank has provided. It might be part of a working capital financing broadly based without any limitation other than an amount. As the financing structure gets more restrictive, the amount of financing might be limited to a percentage of the receivable on the company’s book or to case by case financing against specific receivables. Generally banks provide the looser form of receivable financing and a lesser amount while specialized financing companies such as Factors or structured Asset Based Lenders provide the more restrictive structure financing but more funding.
Factoring is very structured financing. The funds provider, the Factor, actually purchases the receivable from the ‘borrower’ the seller of the receivable without recourse to the seller. Advance rates are generally from 75% to 85% of ‘eligible receivables’ or a receivable that fits the purchase criteria.
Generally eligibility requires that the receivable:
a) represents a true sale and not a contingent or conditional sale,
b) does not represent a partial but complete service or delivery of goods,
c) has a near term maturity date generally below 90 days,
d) is current and not past due,
e) is a definite obligation to pay within a certain date.,
f) has no dilution but represents the total amount, etc.
The Seller has to be careful that it has the right Factor. The Seller (“Borrower”) should examine the following before entering into a factoring agreement:
- The reputation of the Factor
- The financial ability of the Factor to provide consistently the amount of financing needed.
- The pricing is clearly stated and that there are no hidden costs and fees.
A good Factor is an invaluable source for a borrower and can play a very important role in it’s viability.
However Factors do not provide the much needed funds to purchase the goods but only advance funds after the goods have been bought and shipped to the end buyer and invoiced. This is a significant shortcoming of Factors as a source of funding. On the other hand, the more specialized Purchase Order (PO) Financing companies provide not only the funding to purchase the goods but will also carry the financing right through the receivable period. In other words the financing comprehensively covers paying the supplier, the transportation period and the receivable period.
A good PO Finance company can be an invaluable funding source.
Contact Ashford Finance if you need prompt finance to fund your full cycle of funding from the purchase of goods through in-transit inventory to receivable financing.
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