Factoring is the purchase of accounts receivable at a discount for immediate cash.
When a business sells a product or service to a customer, it creates an invoice. Sometimes, these invoices are paid over the course of 15, 30, 60, 90 days or longer. In order to get the cash from the accounts receivable sooner, businesses sometimes borrow against their accounts receivables at a bank.
Some businesses, however, cannot get 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 the business receives 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 accounts receivable, focusing on the credit and payment history of the client’s customer.
The Factoring Process
The factoring process is simple: A business sells its invoices or accounts receivable to a factoring company such as Allied. That factor advances most of the amount invoiced – typically 80% to 90% – to the business after checking 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.
Benefits of Factoring:
Allied’s bridge lender approach helps clients restore financial health and provides a path for clients to establish or re-establish traditional bank financing. The benefits of factoring are:
• 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 receivable 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 accounts receivable 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
As an innovator and respected leader in the factoring industry, Allied wants to be your first and only factoring partner.
Factoring Fact
Allied’s Ideal Client Profile:
• Commercial business with commercial accounts receivable • Annual sales ranging from $1,000,000 to $60,000,000 • Invoices of $100,000 to $5,000,000 per month • Gross profit margin of 20% or greater • Minimum invoice size of $500 • Lack of availability to traditional bank financing products • Good quality products or services • Quality & diversification in accounts receivable • Growing, transitional or restructuring companies
