When a business needs cash but doesn’t want to borrow money they can turn to Invoice Factoring. Rather than a bank loan, outstanding invoices are sold to a factoring company like Capitol National Factors Company, LLC (CNFC).
When your business delivers goods or services to a customer on terms an invoice is created. The average customer may wait 20, 30, or even more days, before paying the invoice.
Rather than wait for payment, your business can receive an immediate advance on the face amount of the invoice from a factoring company like CNFC on approved accounts purchased by CNFC, on the terms and conditions of the factoring agreement.
CNFC marked an advance to you at the time of purchase and keeps back a portion of the purchase price in reserve. When the invoice is collected by CNFC the reserve is released, less the factoring fee and other applicable charges, as more fully discussed in the factoring agreement and the example below. There is no interest or loan fee charged as the process involves the assignment and sale of an approved invoice to CNFC rather than the creation of debt, unless the account debtor disputes its obligations to pay on the account or the account otherwise fails to collect, for reasons other than credit risk assumed by CNFC on purchased accounts, which is solely the risk the account debtor’s financial inability to pay thereon.
7 Steps to Factoring Invoices
Selling (factoring) invoices to CNFC is very straight forward with 7 main steps, illustrated below and more fully described in the factoring agreement:
Step 1 – Invoice your customers for goods sold or services completed.
Step 2 – Submit the invoices to CNFC for its credit approval of the subject customers (the “account debtors”), together with supporting documents.
Step 3 – CNFC does due diligence, typically over a very short number of days, to approve the subject invoices for purchase. Thereafter, CNFC notifies you of those proffered accounts which have been accepted by CNFC for purchase on a Factor-Risk basis, with CNFC assuming the credit risk thereon. All other accounts accepted for purchase which have not been credit approved by CNBFC are sold by you to CNFC a full recourse Client-Risk basis, at your credit risk, not CNFC’s.
Step 4 – CNFC and you, CNFC’s factoring client, advise the customer(s) that the subject invoice(s) accepted for purchase have been sold and assigned to, and are payable by the customers (account debtors) only to, CNFC.
Step 5 – CNFC provides an immediate advance to you on purchased accounts.
Step 6 – CNFC receives payment on the purchased invoices (accounts) directly from your customers.
Step 7 – Following collection of the purchased account(s) by CNFC, we release the reserve balance to your business less our factoring (discount) fee and any other applicable charges which you owe to us.
Accounts Receivable Factoring Example
if a purchased account timely collects
Here is a sample example of how the numbers might work on a factoring transaction where an approved account purchased by CNFC successfully timely collects, within the terms of sale:
- $10,000 – Invoice Amount Customer owes Business
- $ 9,000 – Advance Rate Paid to Business (Assumes 90%)
- $ 1,000 – Reserve Held By CNFC (Assumes 10%)
Invoice Paid In 30 days
- <$250> – Discount Fee Deducted from Reserve (Assumes 2.5%)
- $ 750 – Balance of Reserve Paid to Business
- $9,750 – Total Amount Received by Business
The amount of CNFC’s advance, reserve, and our factoring fees and other charges can vary by industry, customer strength, and how long it takes the customer to pay the invoice.
Some factoring companies might charge a small one-time set up fee to the business upon acceptance. Others will waive the set-up fee depending on the volume and length of the factoring contract. While the assumptions may vary from the example, they will always be clearly spelled out upfront in the proposal and agreement between your business and CNFC.
You will hold for CNFC, in trust, as the legal owner of all purchased accounts which it buys from you, any collections you might receive directly thereon from the account debtors obligated to pay the same, if any account debtor violates instructions in the Notice of Assignment to pay only CNFC directly thereon.
Accounts Receivable Factoring Example
if a purchased account does not timely collect
If a credit-approved account purchased by CNFC at Factor-Risk does NOT timely collect then, after an agreed period set out in the factoring agreement, CNFC will treat the subject account as “deemed” collected, so long as the failure of CNFC to collect is due solely to the account debtor’s financial inability to pay thereon, whereupon CNFC will release the reserve thereon, net of applicable factoring fees (which continue to accrue thru that time) and other charges.
If, however, a credit-approved account initially purchased by CNFC on a Factor-Risk basis fails to timely collect because (i) it was disputed by the account debtor or (ii) you breach any representation, warranty or covenant to us with respect to the account, or (iii) it otherwise failed to collect for any other reason outside the credit-risk assumed initially by CNFC thereon, the account will revert to being a Client-Risk account and will be “charged-back” to you by CNFC. In that event, you will regain legal ownership of the account and assume the credit-risk thereon yourself, but CNFC will retain its security interest in the subject account, now a non-purchased account, as collateral security for your associated obligations to CNFC under the factoring agreement, and you must repay to CNFC the amount of CNFC’s initial advance to you on the subject account(s) plus interest, attorney’s fees and other charges owed by you to CNFC thereon, as more fully set forth in the factoring agreement.
You will also hold for CNFC, in trust, and immediately pay to CNFC, all collections you receive on charged-back accounts.
If any account purchased initially on a Client-Risk basis fails to collect in full within 90-days of the invoice date for any reason, such account will be then, without further action by CNFC, be deemed to have been charged-back and re-purchased by you, as more fully discussed in the factoring agreement.
How Factoring Helps
Factoring provides immediate access to cash so your business can 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 using accounts receivable financing.
During the challenging economy many banks have declined business loans or lines of credit. Factoring provides an option even when banks say no since it is based on the credit worthiness of the customers paying the invoices. This means new companies may qualify and strong financials are not required.
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!
David Tatge
Capitol National Factors Company, LLC