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What is Commercial Factoring and How Does It Work?

If you are a supplier concerned about preserving working capital while waiting for your invoices to get paid, you may want to consider factoring. Many suppliers have discovered that factoring provides an ideal, cost-effective solution for preventing cash flow shortfalls so they can fulfill business demands and keep growing stronger.

What is factoring?

Factoring, also known as “accounts receivable financing,” is a financing agreement between a supplier and a financing company (known as the “factor”). The factor purchases the supplier's accounts receivable on approved customers and assumes the responsibility of collecting payments from the supplier's customers in exchange for a factoring fee.

Who uses factoring?

Factoring is often used by consumer product companies that sell products or services to other companies. Those companies are typically retailers, but they could also be wholesalers or manufacturers.

Benefits of factoring

Outsourcing youraccounts receivable management to a factoring company offers many benefits. Here are some of the advantages you can expect when you work with an experienced factor:

Minimize risk – The factor assumes responsibility if your customer is unable to pay approved invoices.

Maintain cash flow – Factoring converts unpaid accounts receivable to accessible cash.

Save time – The factoring company handles the collection process and bookkeeping functions so you can focus on other areas of business.

How does factoring work?

The factoring process involves the following three steps:

Step 1: Credit approvals and establishing pre-approved credit lines

When a supplier enters a factoring relationship, the factoring company may customize an order submission procedure for online credit approvals via the supplier's computer. The factor may also establish pre-approved credit lines for the supplier's retailers. 

Step 2: Supplier completes and bills retailer orders

The supplier ships the approved orders to its retailers and bills them, indicating on the invoices that they are assigned and payable to the factoring company. 

Step 3: Factoring company collects from retailer

At invoice maturity, the factoring company collects from the retailer and credits the supplier's account. The factor fully manages the accounts receivable including the lock box, cash application and collection of past dues. Retailer deductions or disputes over delivery terms or product are reported to the supplier once the factor is made aware. The factor maintains the accounts receivable ledgers and provides this information to the supplier electronically via internet reporting capabilities. 

What happens if the retailer defaults?

In the event a retailer defaults and is deemed financially unable to pay its debts, the factoring company pays the supplier the value of the undisputed, approved invoice. 

Cash advances are available to the supplier

The factor may provide the supplier with cash advances prior to the maturity date of invoices. This allows the supplier to be paid upon shipment while actually offering credit terms to its retailers. Typical advance rates are up to 90% of the value of the invoice. These advances are subsequently repaid by collection proceeds from their retailers.  

Work with one of the most experienced factors in the industry – CIT

CIT has deep industry knowledge built from over a century of experience. We provide domestic and international factoring services to companies in industries including apparel, consumer goods, consumer electronics, furniture and many others. 

If you are a supplier and want to learn more about our factoring solutions, contact us today. Start acquiring steady cash flow for your accounts receivable and keep your business moving forward.

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