Funding through Factoring:
A factor can be a hedge fund, fund or finance intermediary that provides financing for receivables and purchase orders. The factor is primarily a funding source that agrees to pay a business owner the value of outstanding invoices/purchase orders less a discount for commission and fees. Funding turnaround time is 24-72 hours. The factor provides a credit line to advance most of the invoiced amount to the business owner promptly and the balance of the invoice upon receipt of the funds derived from the invoicing party.
A second option is for the invoice financing company (Hedge Fund) to open up a line of credit with the supplier. The line of credit will be opened in their name and backed by them. This allows businesses with poor credit or few assets to get the supplies that they need.
Factoring is not a loan:
The parties involved did not issue or acquire a debt as a part of the transaction. The proceeds of the funds provided to the business owner in exchange for the accounts receivable are not subject to restrictions with regards to their use.
A hedge fund has agreed to purchase an invoice for $1,000,000 from a construction company that builds shopping center buildings. This invoice represents an outstanding receivable from Walmark Inc. The hedge fund negotiates to discount the invoice by 4 % and will advance $720,000 in 24 hours. The outstanding balance realized by Walmark Inc. will be forwarded by the hedge fund to the construction company upon the receipt of the $1,000,000 million account receivable invoice for Walmark Inc. The Hedge fund fees and commissions for this factoring deal amount to $40,000.
The hedge fund underwriter is focused on the creditworthiness of the party invoiced, Walmark Inc. The credit and income of the construction company are not the deciding element.
Purchase Order Financing and Your Business:
Purchase order financing involves one company paying the supplier of another company, for goods that have been ordered to fulfill a job for a customer. This is an advance and may not be for the entire amount of the supplies, but it will cover a large portion of it. In some cases, companies can qualify for 100% financing. The purchase order finance company (Hedge Fund) will then collect the invoice from the end customer. The purchase order finance company makes their money by charging the company in need of funds various fees. These fees are taken out of the collected invoice. The remaining amount is returned to the company.
A second option is for the purchase order financing company to open up a line of credit with the supplier. The line of credit will be opened in their name and backed by them. This allows businesses with poor credit or few assets to get the supplies that they need.
It’s a small-business owner’s nightmare: Your company lands a major merchandise order from a corporation or government agency but doesn’t have the money to pay for manufacturing and delivery. If you can’t find some cash — fast — your company stands to lose the order and possibly the customer relationship, too.
Unlike bank financing lenders, purchase order financing hinges mostly on the financial strength and creditworthiness of the company who has placed an order with a particular business, and not on the business itself. This makes it a viable option for new businesses and those with average credit.