When a business needs cash but is unable to qualify for a traditional bank loan, doesn’t want to borrow money, and/or wants credit-protection against bad debts, it can turn to invoice factoring. Rather than pledging accounts as security for a bank loan, as in asset-based financing in the form of a revolving line of credit, in a factoring transaction valid outstanding invoices are instead sold to a factoring company such as Capitol National Factors Company, LLC.
When your business delivers goods or services to a customer on terms you create and send an invoice. The average customer may wait 20, 30, or even more days, before paying you on your invoice.
Rather than wait for payment on approved accounts your business can receive an immediate advance against the purchase price of the invoice from the Capitol National Factors on the date of purchase, on the terms of the factoring agreement. Moreover, when accounts are purchased by Capitol National Factors without recourse we assume the risk that the subject invoice(s) cannot be collected when due solely because of the financial inability to pay of your customer (account debtor) obligated thereon; in recourse facilities, however, you retain the credit risk. In both nonrecourse and recourse facilities we do not accept risk that a purchased account cannot be timely collected because your customer disputes the quality or quantity of the goods and services you provided, nor do we accept any risks on ineligible accounts sold to us . Capitol National Factors provides receivables management, bookkeeping, ledgering and collection services to you with respect to the accounts which we purchase as set forth more fully in your particular factoring agreement.
Upon purchase, Capitol National makes a cash advance to you and keeps back a portion of the purchase price (the face value of the invoice, less allowable discounts and credits, net of our discount/factoring fees) in reserve. When the purchased invoice is collected by us the reserve is released less our factoring fees and costs, on the terms and conditions of your factoring agreement. There is no interest or loan fee charged to you as factoring involves your sale and assignment of approved invoices to Capitol National Factors, rather than the creation of debt.
5 Steps to Factoring Invoices
Selling or factoring invoices is very straight forward with 5 main steps:
Step 1 – Invoice your customer for goods sold or services completed.
Step 2 – Submit the invoice to Capitol National Factors for our purchase consideration.
Step 3 – Capitol National Factors provides an immediate cash advance to you at the time of purchase, on approved accounts.
Step 4 – We receive payment on the invoice directly from your customer (however, in some non-notification factoring facilities, you receive payment from your customer in a segregated bank account you establish for this purpose under the factoring agreement, holding such collected proceeds in trust for and promptly remitting them to us).
Step 5 – Capitol National Factors releases the reserve balance to your business less our factoring fees, and costs, on the terms set forth in our factoring agreement.
Accounts Receivable Factoring Example
Here is an example of how the numbers might work on a factoring transaction:
- $10,000 – Invoice Amount Customer owes to you
- $ 9,000 – Advance to you upon purchase (Assumes 90{02115a97f543f71ff28ee6b3a582fffcb3fd1a0af346efedc87099d197bd3a25} advance rate)
- $ 1,000 – Reserve Held By Capitol National Factors (Assumes 10{02115a97f543f71ff28ee6b3a582fffcb3fd1a0af346efedc87099d197bd3a25})
Invoice Paid In 30 days
- <$250> – Fee Deducted from Reserve (Assumes 2.5{02115a97f543f71ff28ee6b3a582fffcb3fd1a0af346efedc87099d197bd3a25})
- $ 750 – Balance of Reserve Paid to Business
- $9,750 – Total Amount Received by Business
The amount of the advance, reserve, and our factoring fees and costs can vary by industry, customer strength, and how long it takes the customer to pay the invoice.
We, like most factoring companies, typically charge a small one-time set-up fee to you upon our execution of a non-binding letter of intent for our delivery of factoring services to your company. You are also charged for the costs to prepare the definitive legal documents and other charges, as set forth in the factoring agreement.
How Factoring Helps
Factoring on an advance factoring basis provides immediate access to cash to your business via the cash advances we make to you upon purchase of the subject accounts, as partial prepayments of our purchase price. You can use our advances to pay bills, meet payroll, purchase inventory or equipment, manage overhead, fund expansion, and increase profits. Over the years many Fortune 500 companies have enhanced their growth, and obtained credit protection and receivables management, collection and ledgering services, by employing factoring.
During times of economic challenge many banks have declined business loans or lines of credit, for both new and established customers. Factoring provides an option even when banks say no since factors rely principally on the credit worthiness of your customers who will be paying on the subject invoices. This means that new and rapidly growing or even some financially troubled companies, all of whom might not otherwise qualify for a traditional bank loan, may be eligible to factor their accounts with Capitol National Factors.
These are just a few of the many advantages of selling invoices over increased debt. For more information please read the Benefits of Factoring and Frequently Asked Questions!
How to Get Started With Factoring
If you are interested in flexible cash flow solutions with accounts receivable factoring please contact us! We will discuss your objectives, answer any questions, and forward the factoring application. If you want to get a head start just download the Online Factoring Application!