Securing Finance Made Easy: Factoring Companies and Their Regulations

Lending is considered to be the driving force behind an economy, or a better analogy would be “oil for an engine”. Lending fuels the economy by increasing money circulation thus generating economic activities. A decrease in lending results in a flat economy and a slow growth.

Over the years, lending has been regulated heavily. Back in the day, banks would lend money to people by looking at their background and character rather than their ability to pay. Today, we see the same banks using a formula that involves assessing borrowers FICO scores. After calculations and analysis, the banks decide whether or not to lend money to companies or people.

Such regulations have made it tough for industries to operate and secure financing. This has resulted in bankruptcy of many small and medium sized businesses in the USA. If businesses were superman, then lending regulations is kryptonite hanging over their hands.

This is where a factoring company comes in. Where banks fail to provide financing or lending to SMEs, factoring companies do just that without the regulations associated with lending.

What are factoring companies?

Factoring companies buy invoices from other businesses who are looking to get cash instantly without having to wait 30 to 90 days for their customers to pay up. Factoring companies then approach those customers for payments giving companies the peace of mind and access to cash to grow without having to worry about waiting for customers to pay up. The act of companies looking to sell their invoices to factoring companies is commonly referred to as invoice factoring.

Is invoice factoring regulated in the USA?

Unlike the banking sector that is completely regulated by government institutions, factoring companies are self regulated. There is no particular government body that monitors such companies. However, factoring companies are members of associations that set standards and best practices in the industry.

Some of the associations operating in the US are the international factoring association and commercial finance association. Members of these associations receive training and the necessary tools to help them equip themselves in the factoring industry.

Some factoring companies choose to be highly transparent showing a preference towards being regulated, however many of these companies prefer to be self-regulated or have minimal government regulation. The argument for that being that regulation has negative impacts on business and would make factoring no different than how lending is nowadays.

One thing to remember when going for factoring is reading the factoring agreement. As mentioned earlier, due to the industry being self-regulated, some companies have more conditions tied to their payments than others.

What is a factoring agreement?

A factoring agreement is just like any other contract or agreement in a business. It has all the conditions mentioned with fees and is signed by the factoring company which is referred to as the “factor” while the business requiring cash is referred to as the “client”. The agreement usually allows clients to borrow more money against their invoices once the initial borrowed amount is paid down.

The issue comes when one does not read the fine print. It includes a lot of hidden charges like high interest rates, fees, overdue charges and more. These kinds of things can make a simple financial transaction very expensive. However, not all companies have such conditions.

With invoice factoring becoming a thing in the USA, many companies compete with one another to provide the best possible deal. It is recommended that you go for a factoring company that not only competes on price but also services like providing a secure login giving borrowers access to their borrowing information letting them know the situation they are in.

If you want to learn more about factoring or want to approach a factoring company with your queries, visit Porter Capital. They offer services like invoice, freight, staffing and oil & gas factoring with access to a secure login.