by Claudia Bruemmer

Companies have relied on factoring to raise cash flow for many years. Factoring is a trade finance procedure where a business sells its invoiced receivables to a third party at a discount in return for cash. Subsequently, the third party, usually a bank or financing company, assumes the responsibility of collecting payment. Since many companies trade internationally and require factoring services, we want to tell you about 1st PMF Bancorp (PMF), a company specializing in factoring and receivable lending in the U.S., Asia and worldwide.

1st PMF Bancorp has specialized in short-term lending (invoice factoring) for over 25 years and has lent billions of dollars internationally. PMF specializes in factoring and receivable lending (aka Asset Based Lending) along with other complementary lending programs such as leasing and trade financing. Because China is now the world’s second largest economy, we will focus on factoring in Asia.

Factoring was introduced in Asia in the1970s and its use increased in the 1980s with the rise of the Asian economies. As a result, the number of Asian businesses using factoring continued to multiply. However, the Asian recession of the 1990s had far reaching effects as financial institutions across the region suffered record bad debt losses. As a result, classic factoring all but disappeared in Asia in 1997.

Since then, there has been a rising demand for factoring that does not require tangible security such as property. Instead, factoring is now the discounting of your invoices to increase your cash flow so you can grow your business. The way it works is that you assign the right to your invoice payments to a factoring or finance company in return for money advances on those invoices. The invoices are discounted, so the bank makes money on the difference and you get the needed cash flow right now instead of waiting until payments come in later. It’s like turning your invoices into cash, which allows you to spend the money you have coming to you for business expenses before you actually collect the money.

Factoring is important to many businesses because it gives them access to cash from less liquid assets like receivables so they can maintain sales momentum and service their new and existing customers without waiting for cash to come through with the traditional collection process, which is slower and takes longer.

Besides allowing your sales to grow and generate more profit, factoring can also help you save money by allowing you to take advantage of early payment discounts from your suppliers since most suppliers offer a 2% discount for paying invoices early.

How much does factoring cost? This depends on the amount of money involved and the credit worthiness of your firm’s customers. Normally, the cost of factoring runs from 1 to 3 percent on most transactions. Another way wholesalers can raise cash flow is with accounts receivable financing, and there is a difference between factoring and accounts receivable financing.

While the difference between these two types of financing appears minor, it can make a big difference depending on the situation. Factoring involves the purchase of all your invoices, and the fees are based on those invoices; whereas, accounts receivable financing provides a bank line borrowing base that only charges based on the invoices used for the advance. Both methods can be advantageous depending on your needs.

Accounts receivable financing is similar to an asset-based borrowing certificate. Your receivable aging is sent in once a month, or weekly, with the eligible line determined from this amount. Then, you can borrow on this line using a borrowing base up to the eligible amount with charges only applying to your underlying collateral.

How do you select a factoring company? An experienced factor that is also a commercial bank lender is the safest factor for any industry. If a factor is a commercial bank lender, then you know you have a wider range of lending capacity available. Also, commercial bank lenders are highly regulated which provides a higher level of trust and reliability.

Banks have internal procedures that create guidelines, with the size of a line of credit being a point of negotiation within general parameters. A quick rule of thumb is a line can be 10-20 percent of total sales depending on industry; however, the more technical rule is that loans be within 1 to 5 times the equity of the company, depending on the industry and overall credit of the business. Below are a few financial terms related to factoring that you might find useful.

• Trade Financing is the financing used for importing and exporting goods. Trade finance is highly structured and uses a financial instrument called a Letter of Credit (LC). An LC is a secured method of payment used for international trade transactions to secure the seller and buyer by using banks that have agreed to be governed internationally by the International Chamber of Commerce rules.

• Import Factoring is factoring or purchasing of receivable(s) that are generated from a company domiciled outside the U.S. that is shipping product into the U.S.

• Export Factoring is factoring or purchasing of receivable(s) that are generated from company in the U.S. selling product to a company outside the U.S.

• Credit Insurance is a financial product to protect a business from non-payment of an invoice. The advantage is that it is backed by a true insurance company even if the factor has an umbrella policy with discretion. Credit insurance claims are adjusted by the insurance company’s internal claims unit.

To summarize, 1st PMF Bancorp makes the factoring process simple with a quick turnaround (within 24 hours if needed). Factoring rates are very competitive and provide wholesalers with the confidence they need to continue their growth while knowing PMF has been in the business for decades and is reliable. PMF’s Factoring Service can serve your company’s growth needs for the near and long term as it provides competitive prime plus bank pricing, competitive advance rates and experience in foreign and domestic business areas.