Becoming a factoring referral partner can be a great way to help out your clients, earn residual income and learn more about this segment of the finance business. To find the right clients, it is good to understand the basics of factoring and what a factoring company looks for in a business they are going to finance.
In this article, we will discuss what factoring is, what businesses are a good fit for this type of financing and how referral partners are compensated and become partners with Meritus Capital.
Factoring is a type of financing that gives businesses the ability to access working capital that is tied up in their outstanding invoices or accounts receivable. It is a transaction where a business sells its invoices to an invoice factoring company to gain access to the tied-up cash. These invoices or receivables are removed from the business’ books and are added to the factoring company’s balance sheet at their fair value.
The factoring company is purchasing these accounts receivable at a discount rate and then waiting on the customers to pay the invoice, whether that is 30, 60 or 90 days later.
Here is an example of how an invoice factoring transaction may work;
Note: All advance rates and discount rates or fees are agreed upon while being set up.
Step 1: The business submits their invoices to the factoring company to receive 80% to 95% of the amount of the factored invoices the same or next day. For example, if you sell $1,000,000 worth of accounts receivables and get a 90% advance, the business will receive $900,000.
Step 2: The invoice factoring company holds the remaining 10% or $100,000 as security until the payment of the invoice or invoices has been received.
Step 3: The factoring company collects payment over the next 30 to 90 day period depending on the clients’ payment terms.
Step 4: Once the payment has been received, the factor makes available to the business utilizing the factoring service, (the seller of the invoices), the remaining 10% less the factoring fee, which typically is between 1% and 3% of the total invoice value.
Factoring referral partners are typically compensated by receiving a percentage (%) of the gross income that the factoring company receives each month. Often the referral fee due to the referral partner is 10%, so if the factoring company makes $5000 in fees in a month, then the referrer will receive $500 as a commission for that month. This is a great way for our partners to earn residual income as we have found that most clients utilize our services for 2-5 years. That means that you will receive a payment each month for the entire life of the deal.
Factoring works great for business that have outstanding B2B or B2G receivables. Some of the industries that often utilize factoring include:
Advantages Of Factoring As A Finance Option For Your Contacts Or Clients
Finding out if a business is a good fit to utilize accounts receivable factoring is not about credit scores or daily account balances. It is more about understanding the business that is looking to receive the financing, what they do and how they do it. As factoring companies are looking to purchase invoices, they need to understand the service that has been provided and invoiced for.
If you have a client that you think may be eligible for factoring, ask yourself if the answers to these 2 questions are yes!
If these things can be determined along with the fact that a business has some going concern” then typically they will be a candidate for accounts receivable factoring.
There are times when factoring is not a great fit as a finance solution for a business. Some common reasons are:
Pre-billed or progress billed invoices
As a factoring company cannot complete the service for the invoice they are purchasing, of course, the service needs to be completed for an AR factoring company to be able to purchase the receivable or invoice. If the invoice is billed before the service is complete, then a factoring company would not be able to purchase or fund against it. In the same way, if an invoice is submitted for a service that is only partially completed then the same problem would arise.
As a factoring company is purchasing invoices primarily based on the creditworthiness of a business customer, they are unable to purchase invoices that are to an individual. Factoring companies are a good fit for companies that have business to business or business to government receivables.
Many businesses simply do not have accounts receivable. Many software companies require payment before any service is rendered and many other types of businesses require up-front payment before starting any work. As accounts receivable factoring companies are basing their funding on outstanding AR, these businesses would not qualify for invoice factoring either.
Building relationships and finding factoring prospects is different for everyone. Some may have particular expertise in one of the core industries that factoring is often utilized. Others may have marketing expertise they can utilize to make the product known to more businesses. Many in the finance industry that offer different loan products will have turn-downs or find that their particular type of financing is not a fit for the business they are working with and can turn their clients to factoring as a solution. There are about 32 million small businesses in the United States and Canada, many of these with a need for financing to help them grow.
Meritus Capital has been in the factoring business for almost 20 years. We have funded billions of dollars to growing businesses throughout the United States and Canada because we choose to look for the reasons why we can make a deal work and try to work through any issues. We are working hard to combine our years of experience with new technology that makes t
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