- Factoring is when You Sell Your Aging Receivables for Immediate Cash
- Invoice Factoring gets Your Invoices Paid within 24 Hours
- Factoring gives your Business Financial Freedom
What is Invoice Factoring?
Invoice factoring is a financial transaction that is available to companies that are business to business. It’s when you sell some or all of your accounts receivables to a factoring company at a discount rate for immediate cash.
The business owner sells their account receivables in the form of an invoice to the factoring company (Alliance One LLC). The factoring company (Alliance One LLC) will advance up to 90% (the other 10% is held in a reserve account) of the face value of the face invoice amount. The factoring company (Alliance One LLC) collects the full amount from the customer in due course and pays the balance amount due to the business owner after deducting the discount fee for the services rendered. Once a business sells an invoice or it's receivables to Alliance One LLC, a verification process must take place before the funds are advanced to the business. An account representative will verify that the products have been delivered or that the services have been rendered. Once the verification of the invoice is completed, the funds are released on that invoice within 24 hours.
Do you own my invoices?
All invoices purchased from the invoice factoring company (Alliance One LLC), become an asset of the factoring company.
What are the Requirements to Factor my invoices?
First, it is important to know that it is not required for your company to factor all of your clients, you pick the customers that you want to factor and you pick the invoices that you want to sell. We do require that you sell us a minimum of one invoice every 30 days over the agreement period. Alliance One LLC is your financial partner, we are here to help you grow your business for the long term.
You get to pick the customers that you want to factor and you decided which invoices you want to sell to us. If you decided to sell us invoices from customer XYZ, INC, then all payments from XYZ INC, need to be paid directly to Alliance One, even if you choose not to sell us all of their invoices. You will only be charged a factoring fee on the invoices that you sell us. All other payments from your customers on invoices that we did not purchase, will be wired back to your account and you will not be charged any factoring fees.
If you have certain clients that are paying you in 15 days after you invoice them, you might not want to factor these invoices. Maybe you can wait 15 days to get paid by your customers but waiting longer than that might cause you to have cashflow issues. Most businesses factor invoices that are between Net 15 days and Net 60 days.
You also need to have a company that is open and in good standing for us to factor for you. At this time we cannot factor for Sole Proprietors.
Your company cannot have any all-asset liens/UCC Filings. If there all asset liens/UCC filings, we will need to have those filings terminated before we can fund you. We can buy our other financing companies but we will need to be in the first lien position before we can fund your account.
Alliance One LLC is not spot factor, we are in it for the long haul, we are your financial partner. Spot factoring is when you have a one-time invoice that you are looking to sell; standard invoice financing/factoring is when you sell us multiple invoices from multiple clients on a daily, weekly or monthly basis.
Some businesses, due to the time frame on when they are paid on their receivables, are concerned about offering longer credit terms to existing clients, which can be resulting in lost opportunities. Offering credit to new clients also presents some challenges, as determining creditworthiness is uncertain and extending long credit terms to strap any business's cash flow.
Businesses turn to invoice factoring companies to solve their working capital issues. Why would a business choose to sell its accounts receivable to a factoring company? This is done to expedite payments, not by their customer but by the factoring company. Factoring gives you the freedom to offer longer credit terms as you will always be paid within 24 hours of the verification process by the factoring company. Knowing that you will get paid on your invoices rapidly give you the opportunity to offer credit terms to new clients. Account receivable financing will allow you to increase your inventory, grow your business and give you peace of mind knowing you have the capital to pay your staff and it will allow you to even pay yourself.
We are your Financial Partner
When you use a factoring company to finance your account receivables, you are making the commitment to bring your business to the next level. Every business needs working capital; some of the largest companies in the USA use invoice factoring companies to solve their financial needs. If you are ready to taste financial freedom, please contact Alliance One LLC today or you can complete our easy one page application.
For a visual understanding of how AR Financing works, click here to watch our video.
Pros and Cons of Invoice Factoring
There are many benefits of invoice factoring for businesses, but there are also some disadvantages as well.
Beware of Double FEEs
Many factoring companies are converting from traditional factoring companies to alternative factoring companies. In the past, factoring companies would only charge you a factoring fee. Today, the majority of factoring companies out there are charging a factoring fee and an APR on the money they gave you. If your customer takes 90 days to pay the factoring company on an open invoice, they will charge you the APR fee for 90 days, plus the factoring fee. To make matters worse, they do not tell you about the APR. If you do not know to ask about the APR, they won't tell you. Typically the APR is hidden deep into the contract that they hope you do not read. Alliance One does not charge an APR, we only charge the factoring fee. If you shop around (and we suggest that you do), make sure you ask a competitor if they charge a factoring fee and an APR. If they charge both, you should run away.
Invoice Factoring Equals "Fast Cash" But at a Cost
Your company may be growing, but you also might have additional staff to pay. Or perhaps your vendors have you capped out on your credit line. Or maybe it’s just your slow season. If this is the case or if there are any other reasons why you find yourself needing fast cash, factoring is a great solution. When you factor your invoices, you are typically one day away from being paid.
Factoring your invoices comes at a cost, which is typically at a higher rate than what you would get in the form of a traditional line of credit from a bank. If you have the ability to get a line of credit from a bank, this is almost always the least expensive way of obtaining working capital. As we all know, banks only want to do business with a company that is well established and has strong financials. The business owners must have excellent personal credit and in most cases, the company will need to have collateral. If you are among the elite who will qualify for a bank line of credit, you still need to have the ability to wait a couple of months to obtain this money. If you are in business and do not have the luxury of time, or if you do not qualify, you need to look at other funding options.
What about UCC Liens?
When you are looking for business financing, either from a traditional bank or from an alternative lender, you cannot have any UCC liens against your company that has a pledge to your accounts. If you have a current loan that has an all asset lien on your company, you will not be able to factor your invoices, unless the current lien holder subordinates their UCC position to the factoring company. If they are not willing to subordinate their UCC position, the only other way to sell your receivables is if the factoring company buys out the current lien holder. To find out if there are any UCC filed against your company you can simply do a Google Search “UCC Search” and type in your state; this should bring you to the Secretary of State’s Website where you can in most states do a free lien search.
Watch out for Long Term Contracts - The Devil is in the Details
If you are considering factoring but not sure which company you should choose, here are some items that you should consider, before selecting a factoring company. Every factoring company has a contract, it’s where all of the details of the agreement reside. In the contract, there will be the terms; everything from the factoring fee and advance rate to the length of the contract and any hidden fees.
- Termination Fees
Most factoring contracts are between 1-5 years, some factoring companies make most of their money in termination fees. Termination fees exist when the seller (you) does not meet the agreed-upon terms in the contract. The longer the contract terms, the higher the fees are. So when shopping around for a factoring company, try to select one that has only a one year term
- Junk Fees
Watch out for companies that have long contracts; the more pages that are in the contract, the more fees you will be hit with. Many factoring companies hide their fees in the later pages of their agreement, hoping that you only read the first few pages. We’ve seen factoring agreements with as little as four pages, and as many as fourteen pages. While you should read every page of every agreement, make sure you give a very close read to the longer contracts, the more you read, the more likely you will see hidden costs.
- Free Trial Periods
The reputable factoring companies will have a free trial period within their agreement. This will allow you to try factoring before you commit to a longer-term. For many companies that have never factored in the past, this is a great way to dip your toes in the water to see if factoring is the right choice for your company. There are only a couple of factoring companies that offer a free trial, but they might not tell you about it, upfront. If you ask for a free trial from a reputable factoring company, chances are good that you will not be denied. If you request a free trial from other factoring companies, where you are denied; use caution before making your final selection. A free trial basically gives you the ability to terminate the agreement (within a certain time period), for any reason, without incurring any termination fees. Why do some companies offer a free trial when others do not; that’s easy. Many factoring companies have hidden fees and high termination costs. If you do not read the agreement carefully, you will be charged outrageous termination fees that you were not expecting and most likely cannot afford to pay. If you have a five-year contract term in the agreement, this can cost you a bundle, as the longer the term the higher the termination fees.
Should you use a broker or a direct lender?
They both have advantages to some degree. Brokers usually deal with multiple lenders, some factoring lenders do not fund in the construction industry and others may not factor in the medical industry. A broker will know where to send your file to have the best chance of getting an approval. This will save you time and aggravation. The downside to brokers is… they are commission-based, so you will typically pay a little higher rate than you would if you went to a direct lender. If your business is in new construction, health care, insurance or another industry that is considered to be high risk, you might be better off working with a broker.
How do you qualify for factoring?
Factoring is not based on your personal credit. So if you have some lump or many lumps, this would not disqualify you for factoring. You need to have a live/active corporation, that has no all asset UCC liens and no Federal Tax Liens (unless you are on a payment plan and can prove payments are being made). Factoring companies want to see that you have multiple customers and can fund at least a few emails per month (the more the merrier). Factoring companies do not like to fund on debtor deals (it’s high risk). Your company can be active for one day or 50 years, you do not need to be in business for a minimum of two years like you would if you were trying to obtain a bank line of credit.
What is really the process of getting funding?
First, you need to complete an application. Once the application is completed, you will be sent an agreement. You review the agreement and then if all is well, you sign it and send it back to the factoring company. Once the factoring company receives the agreement, you will be asked to provide some paperwork; such as a photo ID, the invoices you want to sell, any PO’s that you received, some business bank statements, articles of incorporation and a few other miscellaneous documents. Once the supporting documents are received, your file goes into the underwriter for approval (normally within 24 – 48 hours). After your file is approved, you will be assigned an account rep that will work with you on getting your account funded.
First, it is important to know that once a factoring company purchases your invoices, you get paid from the factoring company and your customers will have to pay the factoring company directly. UCC law requires the factoring company to properly notify your customers that the invoices have been assigned, and are now payable to the factoring company, not to you. All invoices (before being purchased) must be verified by your customers for validity. If an invoice is verified today, you would most likely be funded within 24 hours.
What will my customers think if I use a factoring company?
Factoring has been around for hundreds of years and it’s a multi-billion dollar industry. Chances are that your customers are already, or have at one point, paid a factoring company. It’s a very common practice used by many companies. It’s important to know though, that a factoring company is not a collection company. A factoring company simply advances you the money for a fee. Once you are funded, the factoring company simply waits for your customers to pay them. Using a factoring company, in your customer's eyes, is not a weakness it’s a strength, however, it’s a very common question that is asked. Having a bank line of credit for your working capital is the same thing. Your customers already know that most businesses do not self-fund. However, when factoring your receivables, you should have a conversation with your customers upfront. This way you can inform them that you will be using alternative lending to fund your business. Chances are, it will be a non-issue.
What Type of Business do you Factor for?
Alliance One factors for a wide range of industries. It is important to know that invoice factoring is business to business. If your company invoices other businesses for products and services, you will most likely be able to factor with us. To see a list of typical industries we service please click here. Alliance One does not factor for freight brokers, the medical industry (if you are billing insurance companies), and new construction projects.
Do I have to be a Large Company to Sell My Invoices?
No, we factor for small, medium and large companies, we can also factor for new corporations as well. If you are looking to sell us as little as $1,000 a month or $1,000,000 per month we can factor for you. If you are a startup company, we want to grow with you. If you are an established company, we want to help you get to the next lever.
What's the difference between Invoice Factoring and an AR Line of Credit?
An accounts receivable line of credit and invoice factoring both provide business financing by converting accounts receivable to cash. A line of credit is typically a secured loan using your accounts receivable as collateral. Invoice factoring is the purchase of accounts receivable for immediate cash. When you sell your invoices your are selling your accounts receivable at a discounted rate, there is no APR fee. Invoice factoring is not a loan where a Line of Credit is a loan.
Is Invoice Financing the same a Business Financing?
Business financing can come in many different forms. A bank line of credit is business financing but so is invoice financing, even accepting credit cards is a form of business financing. A company accepts credits to offer to their customer a method of payment that might be more convenient for them. It’s also a way to convert your invoice into fast cash. Imaging if you accepted a credit card payment but the funds from that transaction would get deposited in 30 days, opposed to three days. This would put a hurting your cash flow. Many business customers only pay via check or by a bank wire, based on the net terms that you offer. Waiting to get paid in 30 or 60 days also puts a hurting on your cash flow. When you factoring your invoices, you essentially convert that net termed invoice into instant cash. You no longer have to wait 30 or 60 days for you customers to pay you, which gives you the cash flow to run your business. Do you want to expedite your customers payments? Then please complete our factoring application
Alliance One LLC
Invoice Factoring \ Account Receivable Financing
For New and Established, Small and Mid-Size Businesses
Call Us: 631-435-1000