The Basics of Factoring Financial Services

What is Factoring ?

Factoring goes by many names, including invoice discounting, receivables factoring and debtor financing. In simple terms, factoring is a practice wherein one company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer to make a profit upon collection of monies owed. Factoring transfers ownership of such accounts to another party that then works vigorously to collect the debt

There are several aspects of an existing business that are taken into consideration when getting approved for factoring financial services. The information that is required from any factoring financial servicing company will revolve around average invoice size. This is a huge contributing factor as well as whether the invoices are domestic or international. This means that the company seeking factoring services sells their service or goods outside the boundaries of the home country. The payment terms that were implemented for the invoices will also be considered in assessing the risk factor. The final aspect that any factoring financial services company will consider is the credit worthiness of the clientele base. All of these points together will give the company the opportunity to assess the risk associated with financing the invoices for any existing business.

There are basically two different types applications that are applied by factoring services companies. These are called the discount method and the prime plus method. Many companies use both of these methods of determining the cost that is charged to the client. Each financial situation is unique and most factoring financial services companies accommodate each business client according to their specific situation. With that said, in terms of very general speak, the prime plus method is usually the choice that produces lower rates than the discount method. This is an incredibly important step when finding a company that offers factoring services because many have hidden fees that are not mentioned initially. Find out exactly how each factoring financial services company regulates their factoring fees so there are no surprise fees added on at a later date.

To effectively understand the different methods used by factoring services companies, it is best to individually research each one. Let’s start with the prime plus method to determine factoring financial services fees. The prime plus method has only two fees within its structure. The first part of the fee schedule is a one-time fee that is applied to every invoice. This is generally called the factoring fee. The factoring fees are assessed depending upon the gross amount of the invoice and applied accordingly. The second part of the prime plus method is the interest charge on the financial advance that the factoring services firm is providing. The day that the finances are made available to the business is the day that the interest begins. The interest rate is calculated by a pre-determined amount by the firm and the client before any financial advances are made.

The discount method that is applied to invoices by the factoring financial services firm’s is based on a percentage per number of days. For example, if the discount method were 3% for the first 30 days, it would be calculated accordingly. It isn’t hard to ascertain that the prime plus method is likely the better choice for any potential factoring services customer.