The concept of financing accounts receivable is fairly easy to understand and straight forward. It starts with filling out an application with pertinent business information. The application will lead to a term sheet proposal with the conditions of the relationship. Once the terms and conditions of the factoring relationship have been agreed to, a Factoring Agreement is sent out for review and signing. At this point your account is set up, ready to go.
With Creative Capital Associates, Inc, up to this point you have not incurred any costs and are under no obligation to submit invoices and start factoring. We do not require monthly minimums or a contract renewal period that requires a fee to exit.
Now that the account is set up the regular funding process begins. First, a review of your customer(s) also known as an account debtor, to determine their creditworthiness. Each customer is assigned a credit limit based on this review of public credit reports. The review will result on one of three outcomes; a) good credit no limits b) bad or unavailable credit history so no factoring of those invoices or c) limited credit so a certain dollar credit limit that allows only that much to be outstanding at any given time.
After the credit has been assigned for a customer, an invoice is submitted for funding. A notification correspondence goes out to let the customer know you have assigned the proceeds of the invoice to us, your factoring company. This instructs the customer that until further notice they are to make the payments directly to the factor. This only happens once, the first time a particular account is slated for factoring.
Next, the invoice that has been submitted is verified that the work has been completed and accepted. Either with time sheets or product shipping documents to let us know the invoice is real and the customer is happy with the result and is planning on paying in a timely fashion. This is done usually by phone or email.
If the customer is a government agency and your company is the prime on the contract, then a Notice of Assignment is required. The NOA dictates to the payment office that payments are to be received by a third party.
Once this step is completed, which usually takes a few hours or a day, the invoice is ready to fund. There are three parts to the factoring transaction; a) the advance b) the reserve and the c) service charge. The next post will cover these three parts.
Essentially that’s it. You get your money based on the invoice and the factor waits out the 30 days or so to receive payment that closes out the transaction. There is no loan to be paid off later, and the credit limit is based on the customer, not your financial condition.
Simple, there when you need it, working capital using your invoices as collateral.