Factoring of accounts receivable (such as invoices) is one of the core services we provide at Far West Capital. But invoice factoring is also a frequently misunderstood component of small business financing, so we thought a brief explanation was in order.

(You may also wish to read our hypothetical factoring scenario using a fictitious trucking company.)

Factoring Invoices - The Players

Basically, there are three primary parties involved in the process of factoring invoices.

1. The Invoicing Company - This is the business who has accounts receivable in the form of invoices and would like to turn those invoices into cash flow / working capital. For simplicity, we will refer to the invoicing company as “Acme Corp.”
2. The Invoiced Customer - This is the customer who has been invoiced by Acme Corp and is thus part of Acme’s overall accounts receivable. Acme Corp actually has quite a few customers, so let’s refer to them as Customer A, Customer B, Customer C, etc.
3. The Invoice Factoring Company - This is the financing company that specializes in providing working capital through such services as invoice factoring. This is where Acme Corp will go to try and convert their invoices into working capital, a.k.a. cash flow. Let’s refer to the factoring company as Far West Capital — naturally!

Invoice Factoring - The Process

So now we have a company who issues invoices (Acme Corp), a group of customers who owe these invoices, and a company who specializes in factoring invoices for working capital.

Let’s further imagine — realistically so — that Acme Corp needs to leverage their accounts receivable in order to procure some working capital for their day-to-day operation. So Acme gets in touch with Far West Capital to talk about some financing solutions based on their current accounts receivable. Long story short, Far West takes on some of Acme’s invoices and advances them 80 or 90 percent of the invoice totals.

As a result, Acme Corp has the working capital they need to keep their operations rolling along. And Customer A, Customer B, and the rest of Acme’s accounts will now send their invoice payments to Far West Capital (instead of sending them to Acme).

Here’s an illustration that reiterates the process we just discussed:

Questions for Far West Capital?

This is a somewhat simplified example of the invoice factoring process, but it accounts for most of the major steps involved. If you have more in-depth questions about this process, or if you’d like to talk about the factoring services we provide, please contact a representative today.

Does Michael Vick’s alleged canine chicanery and the meltdown in the subprime mortgage market mean anything to the current state of small business financing? Being a former commercial banker and seeing the last few business cycles… my thought is that both of these seemingly unrelated events will have a “tightening” effect on the market for small business credit and loans. If history is our teacher, as it always is, a seminal event most certainly makes us stop, take a look at the details and ask questions like, “huh, should we be loaning money to people with no money down and bad credit”?

After a period of unprecented global prosperity, where all asset classes: stocks, bonds, commodities, real estates, currencies, have risen and risen together in lock step, we are now asking questions of ourselves… albeit… after the fact. As is always the case, human tendencies make us watch our 401(k)s and cheer, but point to the excesses of others. Dog-fighting is the most recent in a spate of predilictions perpetrated by professional athletes, e.g., Kobe Bryant’s alleged rape situation, steriod use in baseball and cycling, NBA officials gambling, strip club shootings, etc… As the stakes have risen and pop culture has drifted to a “zero tolerance policy”, we are now in a very introspective period. All of this “questioning” is going to cause the pendulum of credit to swing back to conservative underwriting…. which brings us back to you… the consumer of commercial credit and banking services.

Not to worry, this is a healthy swing and will not leave you without alternative sources of capital for your company. Privately financed companies such as Far West Capital are free from regulatory agencies that tend to overeact and swing too far. It is a healthy purging of excess that has to happen in every cycle, and we are confident that American ingenuity will again see us through. Our experienced management team has been through the fires of ups and downs, we are particularly suited to understand relationships that many banks may consider “out of the box”. So, if you are looking for a working capital solution free of the dog-fighting, subprime induced mania that may infect your local banker’s normal sense of reasonableness, give us a call, we listen and we care about your plans.

Many business owners encounter the term “factoring” (or the longer phrase “accounts receivable factoring”) when researching financing options for their company. These industry terms often cause confusion, or else conjure images of complex mathematical processes.

But in truth, factoring — or accounts receivable factoring – is not hard to understand once you have somebody explain the process. In this article we will do just that. We will examine the basic financing process used by most factoring companies.

Accounts Receivable Factoring - By the Numbers

Let’s look at this process one step at a time, using a fictitious (but very realistic) example of Acme Trucking Company. Let’s say the owner of Acme Trucking needs some additional cash flow to pay its drivers and fuel costs.

Like many trucking businesses, Acme Trucking operates heavily on an invoice / accounts receivable basis. They offer terms to many customers, who will then pay the invoice after a job is done.

But as with many small to medium-sized businesses, this type of accounts receivable system can occasionally put a strain on the working capital of the company who uses it. In other words, it can limit the working capital (operational cash flow) needed to keep the business rolling along — pun intended.

So, the owner of Acme Trucking decides to “sell” some of his invoices in exchange for some much-needed working capital, in this case to pay drivers and fuel costs. This is where he turns to a factoring company that offers some form of accounts receivable factoring.

Here’s how the process works:

• Step 1. If Acme Trucking does not already work with a factoring company, he will research factoring companies (such as Far West Capital) through referrals, industry associations, or perhaps using the Internet.
• Step 2. Once the business owner establishes a relationship with a factoring company, he explains his cash flow needs and provides a basic list of his invoice amounts.
• Step 3. Once an acceptable agreement has been made, the owner of Acme Trucking transfers the invoices / accounts receivable to the factoring company.
• Step 4. The factoring company advances 80% - 90% (and industry norm) of the invoice total to Acme Trucking, thus giving him the additional cash flow he needs for fuel costs and driver payments. The factoring company holds the other 10% - 20% of invoice amounts in reserve (similar to escrow), pending the full payment of the invoices.
• Step 5. The customers who owed the invoices to Acme Trucking will now make the payments to the factoring company instead.
• Step 6. When the invoices are fully paid, the factoring company will deduct a fee from the amount held in reserve and give the rest back to the trucking company. (This is how Far West Capital usually operates, but some factoring companies charge their fee up front. Always ask about this in advance.)

Factoring Companies Vary

This is a basic scenario to demonstrate the process of accounts receivable factoring. The important thing to remember is that factoring companies, like any other type of company, will operate differently and provide varying levels of service. So always ask about this process in advance, including fees, reserve amounts, payment process, etc.

Contact Far West Capital

We hope you enjoyed this tutorial on factoring companies, and we welcome any and all questions you may have about accounts receivable factoring and financing. If you have questions about our services, please contact a representative of Far West Capital. We look forward to hearing from you.

Small and medium-sized businesses often face financing challenges that larger companies do not have to deal with. Tight budgets, small margins and high overheard are just a few of the financing challenges small businesses face.

But the startup phase is usually the greatest financial challenge to a small business. In the early stages of a small business, revenues might be small and/or unpredictable. And then there are all of those startup costs, such as equipment, personnel, training, marketing, etc.

Fortunately there are a number of ways to obtain financing for a financing a small business. Here are just a few of those financing options:

• Conventional Loan - A basic loan for a set amount that is made from a traditional lender. Such a loan could help cover the initial financing for a small business.
• Small Business Loan - This is a loan program designed especially for small business financing. Many traditional banks and lenders offer small business loans as part of their product line.
• Accounts Receivable Financing - This is a type of financing for small businesses where the business receives funding based on their accounts receivable. This is one of the financing services that Far West Capital provides.
• Our Services - If your business has some form of accounts receivable / invoicing program in place, you may be a candidate for the small business financing services we provide. If you have questions or would like to learn more, please contact a representative.

Related article: Small Business Factoring Explained

You’ve probably noticed the phrase working capital financing all over our website. It is, after all, a core part of our service. But what is working capital, and what does it have to do with running a small business? Here’s a basic definition:

Working Capital Defined

Working capital refers to liquid assets a company has with which to operate. Mathematically, it is your current assets minus your current liabilities. But it’s easier to understand (and explain) as the cash you currently have on hand to cover expenses.

Inventories and invoices are a type of asset, but they differ from working capital in that they are not readily liquid / spendable.

Our services are built around working capital. Through various means, we provide companies with the cash flow they need to operate their businesses, so our primary service is referred to as working capital financing. We do this through a variety of accounts receivable and inventory financing services.

Questions About Working Capital Finance?

If you have questions about any of the financing services we offer, or about working capital in general, please contact a Far West representative.