Most factoring companies advertise advances ranging from 70% to 90%, depending on the industry of the client. This variation can sometimes baffle clients – why is industry so important? For example, a manufacturing company with solid clients will likely get an advance of 80% to 85%. On the other hand, a staffing agency with similar clients will get a 90% advance.
Why this difference? To many, these distinctions do not make sense.
Understanding and managing risk
Actually, it does make sense from the factor’s point of view. The short answer is that the advance – combined with the rate and other measurements – is a way of controlling risk. Assuming all other things are equal, the staffing agency gets a higher advance than the manufacturing company because their invoices are perceived as being less risky.
If you are not in the staffing industry, don’t take offence at this perception. Let me explain how factoring companies examine risk when determining the advance so that you can understand their perspective.
Here are two examples:
Staffing Company A provides staffing services to Fortune 500 clients. At the end of the week, customer supervisors sign the time sheets for each staffing employee, indicating the number of hours worked and their satisfaction with the work. A signed time card from the customer leaves very little room for an invoice dispute. The signed time card indicates their acceptance of the worked hours. Most factoring companies in Canada see the combination of an invoice and a time sheet as strong evidence that the work was done and that the invoice will be paid in full. Therefore, the factors are willing to offer a higher advance.
Manufacturing Company B provides machine-made widgets to Fortune 500 clients, who buy them in bulk. The goods are manufactured and then shipped by freight carrier to the destination. Generally, the receiving company performs a quick inspection and either accepts or rejects the shipment. However, an accepted shipment does not mark the end of the transaction. If some products are later found defective, the cost of these defective items will be deducted from the invoice. It’s usually difficult to determine if the invoice will be paid in full since small manufacturing errors commonly occur. And, as mentioned before, defective items are deducted from the invoice. This uncertainty (even if small) over the amount of the invoice payment increases the risk of the transaction, and, therefore, reduces your available advance to the range of 80% to 85%.
Transactions have two instalments
Most factoring transactions are paid in two instalments: the advance and the rebate. The advance is provided when the invoice is financed. The rebate is the amount that was not initially advanced, less the fee. The rebate is advanced as soon the the invoice is paid and the transaction is settled.
So if you have an advance of 90%, your rebate is the remaining 10% less the fee. If the advance were 85%, your rebate is the remaining 15% less the fee. Ultimately, when the invoice is paid and the transaction is settled, you receive any remaining money that is due to you. If you want to learn more, please read “What is factoring?”
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We are a leading factoring company in Canada and can provide staffing agencies with high advances at low rates. For more information, get an online quote or call (877) 300 3258.