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Factoring is the sale of pending invoices to a factoring company or a bank at a discount in exchange for cash. Using factoring, invoices can be monetized in as little as 24 to 48 hours for up to 96% of face value.
Seafood factoring is beneficial for many B2B companies in the seafood industry that have creditworthy clients. Factoring does not work as well for B2C companies because their clients have a higher risk profile.
The sale can be done on a recourse or a non-recourse basis. In the case of the former, the invoice is charged back to the client within a specified time period if it is not paid. With non-recourse factoring, the factoring company is fully responsible for an invoice’s collection regardless of the time frame. The client may be charged a fee while the invoice is outstanding.
Factors charge 1% to 5% for their services. That fee is known as a discount rate. On top of the discount rate, factors can also hold a percentage of the invoice as reserve until the invoice is paid. Reserve is more likely to get held back in seafood transactions because they involve physical goods. It covers short payments, credit memos, inaccurate billing amounts, disputes between the customer (debtor) and the client, etc.
Companies such as Business Factors monetize invoices in four simple steps:
- Seafood company provides the factor with a copy of the invoice that it wants to factor
- Invoices are approved by the buyer
- The factor advances a portion of the outstanding amount
- Once the invoice is paid, the business gets the remainder minus the discount rate and any additional fees
Let’s take a look at an example:
- Invoice amount: $10,000
- Advance rate: 90%, or $9,000
- Reserve: $1,000 (10%)
- Discount rate: 2.19%, or $219 every 30 days/li>
- Type of arrangement: Non-recourse
In this example, a seafood wholesaler out of Louisiana is paying $219 per month to factor the invoice. If the invoice is collected in 90 days, the company would pay $657 (and the business would get back $343 from the reserve). If the invoice is not collected at all, there is no chargeback to the business.
Factoring allows seafood companies to quickly obtain working capital by selling outstanding invoices to a factoring company at a discount. It works best for B2B companies due to lower risk profile of their clients.
Most B2B companies in the seafood industry can use factoring as long as they have creditworthy clients. Types of businesses that benefit from include:
- Producers and suppliers
- Importers and exporters
- Seafood processing businesses
- Other companies in the industry
Contact Business Factors & Finance today to see if factoring is a good option the best alternative for your business.
Seafood factoring is a great working capital alternative for most B2B seafood companies. Unlike lending, factoring relies on the creditworthiness of a business’s clients, not its own. Therefore, it is a good option for newer businesses or those with less-than-ideal credit profile. Factoring fees and rates depend on a business’s monthly volume, its clients’ credit and the duration of a factoring arrangement. Factors can purchase just one or two invoices in an arrangement that is known as spot factoring or the entire portfolio of invoices (whole ledger factoring).
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