What is Factoring?
Factoring, by definition, is the purchase of accounts receivable at a discount for immediate cash. When a business sells a product or service to a customer, that business provides an invoice stating the products or services sold and the amount the customer has agreed to pay, creating an IOU from the customer to the business.
Sometimes, these invoices are paid immediately while other times, they are paid over the course of 15, 30, 60 or 90 days or even longer. In order to be able to use the cash from the receivable sooner, businesses will sometimes borrow against their receivables at a bank. Some businesses, however, are not able to obtain bank financing for any number of reasons; high leverage, negative net worth, poor earnings history, bankruptcy, etc. These businesses will sometimes turn to factors.
A factor will purchase, not lend on, specific accounts receivable from the business at a discounted amount. The immediate cash received by the business can then be used to purchase more raw materials to create additional sales, take vendor discounts for early payment or just meet payroll, rent or other pressing obligations.
The factor is able to work with clients who are not bankable because they actually take ownership of the receivable and therefore, look primarily to the credit and payment history of the client’s customer. Due diligence is performed on the client company as well to insure that we understand the operations of the business, that the company is viable, has a good product or service, has sufficient gross margins to support factoring fees and no items that could impair the factor’s ability to take ownership of the receivable or to collect from the client’s customer.
The factoring process is fairly simple. A business sells its invoices or accounts receivable to a factor, such as Allied Capital, that specializes in collecting their payments. That factor advances most of the amount invoiced -- typically 80% to 90% -- to the business after checking out the credit-worthiness of the billed party. After the invoice is paid in full, the factor remits the balance to the client, minus a transaction, or factoring fee.
Allied’s bridge lender approach helps clients restore their financial health and provides a return path for the client to establish or re-establish a traditional lending relationship once the client’s financial profile improves.
Allied is an innovator in the factoring industry, developing client-friendly terms that enable greater flexibility than many of our competitors. Our exceptional customer service, strong business partnerships, operational excellence and efficiency (including the development of Six Sigma processes) have propelled Allied to a leadership position in the industry.
Benefits of Factoring
- Obtain an instant source of working capital/cash flow
- Finance rapid sales growth
- Fulfill payroll and tax obligations
- Purchase necessary equipment or inventory
- Take advantage of trade discounts
- Outsource accounts receivables management and eliminate internal collection and accounting costs
- Reduce the risk of credit losses on your customers
- Defer to our professional credit checking and collections system
- Provide maximum funding for companies with a high concentration of A/R in one or two of their major customers
- Obtain financing for businesses with a negative net worth, a history of operating losses and/or highly leveraged companies
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What Do I Need to Know?
Factoring is quite common in the business world today. Most of our clients’ customers will be familiar with factoring and the factoring process. It is quite possible these customers may use factoring themselves, or they could be familiar with the process through other vendors. Many large corporations even have an accounts payable department dedicated to dealing with companies that factor.
Allied would not be as successful as it is if we had a track record of upsetting customer relationships. It is in Allied’s best interest to leave the primary interface for customer accounts with our customer. Allied maintains the collection process for our customer and verifies invoices have been received, however, our client maintains all other aspects. Most companies are relieved to let go of the collection process as Allied has significant experience in speeding up collections for the client.
The client should also be aware that he/she doesn’t have to factor all of the company’s accounts receivable. With Allied, the client can choose which customers to factor, and those are the only customers to be notified of the relationship. The client maintains control over all other customers, and they will not be aware of the factoring relationship. One of the main reasons clients choose factoring with Allied is due to our flexibility. The client can factor which invoices he/she wants when he/she wants. The facility is there to be used as needed.
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Quality Control and Service Assurances
At Allied, we work tirelessly to achieve the highest customer service standards. We strive to achieve a 24 hour turnaround on all application requests, we have a streamlined, in-house documentation process, and we employ experienced customer service oriented account managers to handle the relationships on a daily basis. We pride ourselves on rapid response and turnaround times throughout all stages of contact with Allied.
Allied is focused on customer service. We routinely solicit customer feedback through customer service surveys, sent to our clients twice a year. We then report back to our clients on feedback received and changes we have implemented to improve our service. This quality control process is administered by an independent third party, and the results can, upon request, be provided directly to you. In today’s environment, where there is much emphasis placed on quality service and control, we recognize this to be very important.
Though factoring relationships can be short term in duration, Allied Capital Partners strives to create lasting customer relationships that position the client to improve their business to the point where they will qualify for bank financing. One of the primary goals for Allied Capital Partners in every relationship is, and always will be, Helping Business Owners Succeed.
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Allied Capital Partners, L.P.
Headquarters
Prestonwood Tower, 5151 Beltline Road, Suite 500, Dallas, TX 75254
Phone: 972-776-5300 | Fax: 972-404-9955 | Toll Free: 877-404-9904
Email: info@acplp.com
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