Factoring is a word often misused synonymously with accounts receivable financing. Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) at a discount. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables, not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of an asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.
 

The three parties directly involved are: the seller, debtor, and the factor. The seller is owed money (usually for work performed or goods sold) by the second party, the debtor. The seller then sells one or more of its invoices at a discount to the third party, the specialized financial organization (aka the factor) to obtain cash. The debtor then directly pays the factor the full value of the invoice.

Astute invoice sellers can use a combination of techniques to cover the range of 1% to 5% plus cost of factoring for invoices paid within 50 to 60 days or more. In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. In effect the customer is willing to pay the supplier to be their bank and reduce the equity the customer needs to run their business. To counter this it is a widespread practice to offer a prompt payment discount on the invoice. This is commonly set out on an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be relied upon to systematically take the discount, particularly for low value invoices - under $100,000 - so cash inflow estimates are highly variable and thus not a reliable basis upon which to make commitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10% (depending on the industry standard) in return for prompt payment. Large firms also use the technique of factoring at the end of reporting periods to ‘dress’ their balance sheet by showing cash instead of accounts receivable There are a number of varieties of factoring arrangements offered to invoice sellers depending upon their specific requirements. The basic ones are described under the heading Factors below.

Factoring is a flexible form of loan, which advances money to a company as it issues new invoices. This is different to overdrafts or more formal loans, which are usually for a fixed amount.

There are two major advantages of factoring compared to overdrafts or other loans. Firstly, factoring is flexible in that the amount a company can borrow grows with sales. This is often essential to enable companies to fund that growth, since they must usually pay for supplies before they receive payment from customers. The second advantage factoring offers is that no other assets are needed to secure the funding.

More factoring Information

How does it work?

A factoring company will lend a company a certain percentage of each invoice that it issues; it will then collect the invoice when it becomes due and pay the balance back to the issuing company. The factoring company charges a fee, usually a very small percentage of the value of each invoice, and interest on the amount of money borrowed.

Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor following receipt of notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds.

Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer/debtor’s processes. Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed however, it is a matter of indifference who is paid.

Companies that typically benefit from factoring include:

1. Seasonal businesses.
2. Start-ups.
3. Undercapitalized businesses.
4. Businesses experiencing rapid growth.
5. Businesses that can't secure traditional bank loans.

While factoring is an attractive alternative to raising equity for small innovative fast-growing firms, the same financial technique can be used to turn around a fundamentally good business whose management has encountered a perfect storm or made significant business mistakes which have made it impossible for the firm to work within the constraints of a bank line’s credit terms and conditions(i.e, covenants). The value of using factoring for this purpose is that it provides management time to implement the changes required to turn the business around. The firm is paying to have the option of a future the owners control. The association of factoring with troubled situations accounts for the half truth of it being labeled 'last resort' financing. However, use of the technique when there is only a modest spread between the revenue from a sale and its cost is not advisable for turnarounds. Nor are turnarounds usually able to recreate wealth for the owners in this situation.

OCF Factoring
Financial Services
 - Providing factoring financial services nationwide
 - Over 70 years of factoring company experience
 - Up to 97% Advance Rates

What Sets Us Apart 
Our  factoring financial services program includes
the following features  
• Same Day funding on approved invoices
• We do not require a long term contract.
• 97% advance rates; tops in the industry
• Credit analysis on new and existing customers
• Continuous collection management and
   follow up on factored invoices
• Invoice and statement mailing (postage included)
• Account status inquiries anytime;
  24/7 online account access.

Our flexibility allows you to maintain control:
• You select accounts you prefer to factor
   on an invoice by invoice basis.
• You control total factoring costs by only
,  factoring on an "as needed" basis.

Up to 97% Advance Rates:
Advance rates are based on overall risk
associated with a particular industry as
well as experience and track record.
We hold reserve accounts to accommodate
industries which typically experience dilution
and that we would otherwise not be able
to service. Advance rates range from
80% to 97% of the gross invoice amount.

Factoring Financial Services Fee Structures:
Fees are determined based on your industry,
the credit worthiness of your customers,
how quickly your invoices turn, and
monthly invoice factoring volume.

OCF provides individualized customer service,
by tailoring our flexible invoice factoring
programs to fit the individual
needs of each of our clients. We strive to
be responsive, handling receivables
with speed, efficiency, and a personal touch.

As a client you are assigned one account
administrator who will personally handle
all of your account activity and inquiries.
This gives us the ability to buy your r
eceivables and get the money to
you within 12 to 24 hours.

Having one person look after your  factoring service
account also makes it easy for you to decide
which invoices you are going to sell and
when you want to sell those invoices.

Our funding is primarily done by
direct deposit or wire.

OCF has more than 70 years of successful
cash flow and credit management experience,
experience we would love to put to work for you.

To talk with a member of our sales team,
please contact one of our regional offices at:

Toll Free:  888-266-0197

We offer multiple factoring services to fully meet the cash flow needs of your company, including invoice financing, credit services and accounts receivables management. Whether it's a brief business relationship or a long-term partnership, We can give you the cash flow you need when you need it most. Learn more about which factoring service is right for your business.
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A company must notify all its customers of the new arrangement, and hand over the task of collecting debts to the factoring company. Often at the start of a new factoring relationship, the factor will take on existing debtors, which can involve a very substantial payment being made right at the start.

Setting up a factoring deal can be done far more quickly than most other forms of finance.The staff at factoring companies are often more commercial than at some other lending institutions, and will work hard to help find a solution for potential client companies such as: