Understanding Asset Based Factoring For Business
Asset Based Factoring also known as Asset Based Financing or Asset Based Lending
, is a favored method of financing illiquidity for start ups, small to medium sized businesses and for any business that simply cant get or has insufficient bank lines available.It simply consists of companies selling their accounts receivable for immediate cash. In order for a business to grow it needs a strong reliable cash flows. Without available cash, a business remaining without cover for all its weekly and monthly expenses, is doomed.
Factoring companies will usuallyfund 80% of verified or confirmed unpaid gross invoices within 24 hours of delivery of the goods or completion of the service rendered. The outstanding 20, less a discount, is paid as soon as the clients customers (the debtors) pay the invoices.
As an example, when a business invoices a total of say, $100,000, the factoring company will fund $80,000 immediately to the business. Once the customer pays the factoring company for the full gross value of the invoice, the remaining $20,000, minus the fee, is sent (usually electronically) immediately to the client.
So depending on size, credit worthiness and the time the invoice remains unpaid, the client ends up with 97% - 98% while the factor takes 2% - 3%.
History proves that during times of economic challenges, factoring proves to be the most practical alternative. When loans from banks are impossible to obtain, many businesses consider paying a slightly higher rate in order to have the factors immediate working capital.
There is a famous saying, After 6 weeks, when banks say NO after 1 week, the factoring company says YES. The reason for this is that banks mainly look at the clients history, their balance sheets and credit rating while factoring companies are primarily concerned with their clients customers.
In reality the business does not incur any debt itself. A funding company buys all the invoices from 100% credit worthy customers.
Clients usually prefer this form of funding because they know that unless the factor checks their customers credit, the factor recourse may cause the factor to claim unpaid invoices from the client.
From the customers perspective, there is no difference is issuing payments directly to the factor. Usually these customers are fairly large organizations who want to ensure the normal growth of their suppliers (the factor client) so they can maintain their own future business.
Factoring does not cost the customer ANY money and they have exactly the same time to pay as if no factoring existed.
If a business has an existing loan, it is still possible to factor its receivables. A business is required to let the lender know if the bank has filed a lien against its accounts receivable.
Even then some banks may subordinate to the factor because the bank knows that growth is assured with the factor so the bank retains a growing viable client.
Furthermore, if a business is in arrears with its GST, Source Deductions or PST, it is still possible to be approved for funding through asset based factoring. Governments have been known to work with businesses in this regard, knowing that receiving working through factoring is exactly what is needed to grow.
A business going through a bankruptcy will be considered on a case by case basis. This is possible because of the strength and spread or risk of the debtors.
To apply for funding through asset based factoring, a business will need to fill out a simple application, provide a detailed customer list, an accounts receivable aging report, accounts payable report and it's articles of incorporation and its business licenses.
Usually from the time the application is submitted to the time funding is received, less than 10 days elapse. Usually funds are dispersed within 24 hours of a term sheet or proposal being submitted.
Asset based factoring gives business owners access to immediate cash, leveraged against their creditworthy clients. In light of today's credit environment, more and more businesses are looking to factoring their receivables in order to allow them to grow in the short term.
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