Factoring 101

Old Line, Discount and Spot Factoring

Factoring is a corporate finance technique that enables a company to either:

1) Transfer the credit risk of its accounts receivable to a third party and/or;

2) Leverage its accounts receivable to accelerate its working capital through the sale of its accounts receivable to a third party. 

There are three types of factoring that are commonly offered by asset-based lenders and factors. They include: Old Line, Discount and Spot Factoring.

Old Line Factoring

More commonly known as Factoring, this structured transaction has two components. The first is a factoring commission charged against the face value of the invoice value in exchange for Capstone taking the credit risk on the accounts receivable. The other, is an interest rate charged against the advance, if one is requested.  The interest charges run through the day the account debtor pays the invoice and is deducted from the invoice payment along with the commission charged for guaranteeing the creditworthiness of the account debtor.  In the event the account debtor does not pay the receivable -- or, becomes insolvent and the goods have been accepted by the account debtor -- Capstone pays the difference between the face value of the invoice and the amount of the advance, less the commission and interest earned to and through the date of default.  Typically, a company with a positive net worth and a strong period of operations qualify for this type of factoring.  A borrowing base report is used as the mechanism to get advances for working capital.

Discount Factoring

Structured for development stage companies, a commission is charged for the purchase of an assignment of the credit risk to Capstone and the cost of funds for the advance are charged as one combined fee called a commission.  Typically, each invoice or assignment schedule is purchased from the company by Capstone and a working capital advance is made each time a schedule of accounts receivables or an accounts receivable is sold to Capstone by the client.  The reserve account is disbursed to the company after the account debtor pays the amount due under the factored invoices to Capstone.  The reserve account is the difference between the amount paid and the amount advanced by Capstone, less any commissions earned by Capstone.

Spot Factoring

Start-ups or firms simply in need of immediate cash are good candidates for this program. Spot factoring does not require any multi-year contracts and provides the company with the flexibility of selling invoices to Capstone, only when working capital is needed. There is no obligation to sell a minimum number of invoices per year or over the term of a contract.  Otherwise, it operates just like Discount Factoring.

With flexible factoring structures, Capstone will customize a program specific to your business that will help achieve your growth goals.