Financial factoring is a cash flow process where a company sells its open accounts receivable to a third-party firm. This results in an immediate cash influx while avoiding the collections process. Best tips for financial factoring include using a third party with the lowest fees, factoring the oldest accounts receivable and conducting thorough credit checks on credit-sale customers. These steps ensure the company will maximize cash received from factor and not incur charge backs for bad accounts.
Factoring firms can charge fees in a variety of ways. Among the most common is charging a fee percentage against the total dollars factored. For example, the factor may charge 10 percent upfront for the amount factored. A portion of this initial fee — around 2 or 3 percent — may be refunded when the factor collects all the open accounts receivable. This refund percentage may hinge on how much of the factored accounts remain uncollectable.
Another best tip for financial factoring is to use a factoring service that charges a fixed fee. The fee may increase depending on the amount of receivables a company sells to the third party. No refunds typically exist with fixed factoring charges. The amount simply stays the same based on the dollar amount.
Companies should factor the oldest accounts receivable first when engaging in financial factoring. These accounts typically have the highest opportunity for default. Small companies with few resources to collect these receivables often engage in factoring. Old receivables are typically 90- or 120-days-old on a standard accounts receivable aging report. Companies can start with the oldest receivables first and then work their way forward, say to those 60 days or older.
Thorough credit checks are often necessary when selling goods and services on credit. Companies will engage in credit checks to ensure customers have the ability to pay off their accounts. In financial factoring, third-party firms may review a company’s credit checks on its customers. This may determine whether or not the factoring company will purchase the open accounts receivable. Failure to provide factors with this information may result in the inability to factor accounts.
Factoring does have its disadvantages. Companies are no longer in control of their customer’s accounts. This can result in customers receiving multiple collection calls. Customers may dislike this process and become upset with the company, not knowing their accounts were factored. Customers may also wind up paying the factor rather than the company. This brings up questions about whether or not a customer’s personal information was sold to the factor, often a touchy subject.