Factoring Vibe

 

 1)      What is factoring?

A factor, such as Universal Funding Corporation, purchases your accounts receivable invoices at a discount, advancing cash within hours of product/service delivery, then receives the payment from your customers.  The advance is paid back to the factor, plus a small fee, and the remainder is rebated back to you.

2)      How does it work?

(1)    We buy your A/R invoices, advancing up to 90% within 2 hours.

(2)    You bill your customers as usual, just with our return address.  We remain transparent.

(3)    When your customer pays, we deduct our fee (as low as 1%) and fund you the remainder.

3)      Why factor my receivables?

Small to medium-sized companies that do business to business transactions and offer 30-90 day credit terms often suffer from a cash flow gap between the time of invoice and payment.  During that time bills begin to stack up, inventory grows thin, new business may be turned down due to lack of cash to buy materials, pay employees, and advertise.  Cash flow issues are the most common cause of business failure.  Factoring can bridge the gap between invoice and payment to keep your business growing.

4)      I’ve never heard of factoring.  Is it new?

Factoring has been around for over 4,000 years, since the time of Mesopotamian King Hammurabi.  Early trading enterprises were funded by factors because of the long wait between the time to get the goods from far away lands and sell them in the marketplace.

The common practice of factoring as we know it today started some 600 years ago, with its roots in what is now called the merchant banking industry.  Beginning in the 18^th century, American colonists produced cotton, furs and timber for shipment to Europe, so factors advanced the money against these colonial account receivables.  Thus, international trade markets were formed.

Today, accepting credit cards as a method of payment in retail transactions is a form of factoring.  Let’s say you use your credit card to buy a pair of boots from Mr. D’s General Store.   When your credit card is swiped, Mr. D receives a deposit into his bank account, but the amount he receives is not the total amount of the sale.   A fee of 2% to 5% is deducted by the credit card company for advancing Mr. D the cash against your promise to pay your credit card bill. 

The credit card company is the factor in this scenario, but the big difference is that they charge a fee to the merchant as well as the customer.  Unlike Visa® or MasterCard®, invoice factoring companies do not charge your customers interest.

5)      How much does it cost?

There are many factors to consider when calculating the cost of factoring.  (Pardon the pun.)  One of the many benefits of factoring invoices is the value of turning your money more quickly, thus increasing your profits.  Here’s an example:

Let’s say you’re in the custom golf cart business and it costs you $7,000 to produce one golf cart in 15 days.  Your customer agrees to pay $10,000 for the cart, but needs 30 days to pay.  That’s a total of 45 days without any cash to cover the cost of producing another golf cart.  Once you get paid for the first cart and cover the cost of building a second cart, you have $3,000 profit. 

It takes another $7,000 and 15 days to produce the second golf cart and another 30 days to get paid.  Now a total of 90 days have passed and only two golf carts have been built and sold.  Your total profit so far is $6,000; still not enough to build two carts at once to get ahead.  At this rate, you’re turning your money every 45 days and can only produce 9 golf carts per year, yielding $27,000 in profits.

If you could be paid as soon as you deliver, you could build a golf cart every 15 days, for a total of 24 per year.  Turning your money 24 times a year yields $72,000 in profits, all the while using $7,000 in working capital to build each cart.  The difference between $27,000 and $72,000 is what it costs you not to factor when your customers take 30 days to pay ($45,000!!!).

But what about the actual cost of factoring, you ask.  Let’s continue with the example above, but we’ll assume your business has grown, thanks to factoring.  Now you’re building 10 golf carts per month.  Your customer is Ray’s Golf World and he agrees to buy all $100,000 of your carts every month with 30 day payment terms.  You also have terms with Universal Funding of 1.5% for 30 days and an advance rate of 85%.

You decide to factor Ray’s invoices each month in order to grow your business even more.  Each month, upon Ray’s invoice verification, we wire $85,000 into your account.  Thirty days later, Ray pays the $100,000.  We deduct $1,500 (1.5%) and pay you the balance of $13,500. 

Most people want to calculate the cost of factoring by multiplying 1.5% by 12 months (18% annual percentage rate).  That’s how the banks operate, but the factoring rate is calculated by multiplying $1,500 (1.5% of $100K) by 12 months.  The factoring fee is $18,000, 1.5% of the annual invoices, which are $1.2 million.

It may seem like a lot of money, but how much do you pay your vendors by taking advantage of their 30 day terms?  Many vendors offer 1% or 2% discounts if the invoice is paid within ten days rather than 30 days.  With factoring, you are able to pay your vendors within the discount period. 

A 2% discount on a $7,000 invoice is $140!  At 10 carts per month, you would owe the vendor $70,000, so that discount adds up to $1,400 per month and $16,800 per year.  Compare that to the annual cost of factoring, which is $18,000.  The money saved by paying your bills early can nearly offset the rate, as well as build credibility with your vendors.

6)      How are the rates determined?

Rates start at 1% and are determined by many factors, such as your sales volume, your customers’ credit strength, trends in customer payment cycles, invoice amounts, and the current climate of your industry.

7)      My credit isn’t so good.  Can I still qualify for factoring?

Yes.  We will consider credit scores as low as 550, but our main focus is the credit strength of your customers.  We are able to access public information without your customer ever knowing we checked out their credit.

      Can a startup or new business qualify for factoring?

We have helped many companies in their early stages grow into profitable businesses by being a constant cash flow source.  Since it’s your customer who pays, we concentrate more on their creditworthiness and history in business.

9)      What do I need to do to get started?

(1)    Fill out our 1 page application.

(2)    Send your A/R aging report.

(3)    Provide a sample invoice.

10)  How long does it take to get funding?

Your application can be approved in as little as 2 business days.  Our team works hard to quickly process your information so that you can have cash wired into your account within a few hours after approval. 

Get working capital direct from the source at Universal Funding, a family owned and operated factoring company in Spokane, Washington.