Accounts receivable factoring is a form of financing where a business sells its accounts receivable to a financier known as a factor.
FACTORING IS A TWO STEP PROCESS:
Consider a software development company who has just delivered $100,000 of software to a major computer manufacturer.
Instead of waiting the typical payment period, which could be 90 days or more, the software company could factor the invoice with Hamilton and receive between $70,000 and $85,000 within 24 hours. This cash could then be used to fund a marketing campaign for a new software release, or simply to pay off some outstanding debt. As soon as the computer manufacturer remits payment, and the payment is cleared by Hamilton, the software company will receive the remaining value of the invoice minus the factor's fee.
FACTORING VS. A LOAN
Factoring on the financial spectrum.
For firms desiring financial flexibility, factoring fills the void between traditional bank credit and equity participation. Banks remain the option of choice for the cost sensitive borrower. However, for businesses with few assets for collateral or a weak statement of cash flows, bank financing is usually unobtainable. If it can be obtained, the business owner must be prepared to endure restrictive terms, covenants, and guarantees.
At the other end of the spectrum, equity capital generally remains the most expensive option. That is, assuming the business owner is able to attract a venture capitalist or other private investor. Given the effects on business ownership and profit sharing, businesses never stop paying for equity capital. Furthermore, business owners may encounter untimely demands for repayment, as well as unwelcome or meddlesome equity partners.
Positioned firmly in the center of this continuum is today's factor. Factoring increases cash flow without any debt obligation (good for your balance sheet) and is generally shorter in term. Thus, factoring can be far more flexible with fewer restrictions and covenants than bank financing. And, because factoring does not seek to establish an equity position with clients, ownership dilution and buyouts are not an issue. Factoring is not entirely dependent, as banks and other investors are, on the financial soundness of the business, instead factors look at the soundness of the business's customers and their ability to pay.
For start-up businesses that lack impressive financials or businesses that do not want to enter restrictive agreements and long-term commitment, factoring can be a desirable financial tool to increase cash flow.
WHO QUALIFIES FOR FACTORING?
Almost all of Hamilton's clientele are small, mid-size and/or rapidly growing businesses. Hamilton makes no distinction between manufacturers or service providers, large corporations or closely-held firms.
Simply, if a company makes and sells a product, or delivers a service to a credit-worthy commercial customer, that firm is a candidate for Hamilton's financial assistance.
Hamilton's diverse clientele share several common traits:
- The need for working capital to support operations required for revenue growth (e.g., marketing, product development, payroll, accounts payable).
- Periodic cash flow pressure is experienced more than 2 to 3 times per year.
- For any number of reasons, typically do not possess or choose not to utilize traditional bank credit lines to support operational growth.
- The need for accelerated receipt of outstanding invoices.
- The desire to take advantage of trade discounts or other long-term sensible financial investments.
While Hamilton recognizes the need and merit for exceptions, clients are typically required to:
- Business must be LLC, C Corp, S Corp (not D/B/A, sole proprietorship, or partnership).
- Generate revenues of at least $100,000 per year.
- Be profitable, or if not, possess a credible plan to achieve profitability within 1 year.
- Have a clean tax record or the ability to correct current deficiencies.
- Have no liens currently outstanding against corporate receivables. In other words, accounts receivable are not already pledged as collateral.
- Have invoices for potential financing with a minimum size of $200.
- Possess strong customer relationships.
FREQUENTLY ASKED QUESTIONS
Businesses do not have to have an outstanding credit history to factor. Instead, Hamilton primarily analyzes the customer’s credit. This means Hamilton looks at the credit-worthiness of its clients’ customers and their ability to pay. This is beneficial to new companies that do not have an established credit history to secure loans or other financing.
Hamilton goes to great lengths to remain in the background of its clients’ customer relationships. Clients maintain primary interface with their customer accounts and operational functions to ensure smooth transactions.
Hamilton maintains a modified non-recourse structure, which means Hamilton assumes only credit-risk in its agreement to factor. Hamilton incurs losses greater than $5,000 if the reason for non-payment is due to credit failure or insolvency of its clients’ customers.
Hamilton allows companies to factor when, and how often, the need arises. A company can factor all its invoices one month, and none the next, depending on their cash flow needs.
Although factoring is not common knowledge to all businesses, it is often used in the business world. Many companies, including Fortune 500 companies such as Applied Materials, Bethlehem Steel, Xerox, and Lucent Technologies, use factoring as a form of financing.
- Focus on business operations instead of cash flow concerns
- Increase production and sales
- Take advantage of trade discounts, or those discounts offered by suppliers for early payment
- Meet payroll or payroll taxes
- Finance expansion without debt
- Fund marketing or e-commerce projects
- Pay off outstanding debt
- Improve credit rating with timely payments
- Improve balance sheet by increasing cash and decreasing A/R
- Eliminate need for outside investment, such as loans, credit cards
- Position business for outside investment, such as bank financing or SBA loans
It depends. Compared to bank funding, yes. However, factoring remains cheaper than most forms of equity (venture capital) funding. Utilized in an efficient way, factoring can be quite cost-effective. Here are some options:
- Knowing the typical payback period of customers will allow a business to factor an invoice at the right time along its payment cycle, and thus reduce the cost to that business. For example, if a customer usually pays on the 40th day, a business might want to factor the invoice on the 20th day to limit the fees charged.
- With the funds it receives from factoring, a business can take advantage of early payment discounts offered by their suppliers. For example, a business might be able to save 3% from its supplier if it uses factored money to pay off debt within 15 days.
- With more working capital, businesses have the capability to purchase higher volumes of supplies, thus making them eligible for volume discounts from suppliers.
- A business can stop offering its customers early payment discounts since it receives its funds immediately from factoring.
- A business could increase its prices to offset any fees incurred from factoring. It could also increase its prices by a percentage and offer an early payment discount at the same percentage to those customers who pay within a given period. This way, timely paying customers would pay the original prices, while late paying customers would offset any factoring fees.
Whether it’s through diverse product offering, unmatched flexibility, or superlative customer service, Hamilton is driven to be a leader within the factoring industry.
Hamilton’s commitment to their clients is unmistakable. Every decision Hamilton makes is based on their clients needs, tailored to help their clients reach their full potential.