When many people think of "factoring" they think of CIT. As the nation's largest provider of factoring services, we are committed to providing a complete array of factoring and related services with the highest level of service quality.

Below is a list of frequently asked questions about factoring. If you have additional questions or if you would like to discuss how you can put the resources of the nation's largest factoring organization to work for your company, please contact us. We look forward to working with you.

Frequently Asked Questions

What is factoring?
What are the benefits of factoring?
What types of companies can benefit from factoring?
Why use factoring?
What does it cost?
How does factoring work?
Can factoring help your company? Take this test!
Why use CIT?
What size companies does CIT serve?
What industries does CIT specialize in?
Want to learn more?

What is factoring?

Factoring is a complete financial package that combines:

1. Credit protection
2. Accounts receivable bookkeeping
3. Collection services
4. Financing

Factoring is an agreement between CIT and your company in which CIT purchases your accounts receivable (without recourse) and assumes responsibility for your customers' financial ability to pay. If a customer is financially unable to pay its debts, CIT incurs the responsibility for payment. CIT extends credit to your customers, collects the accounts receivable from your customers and performs the related bookkeeping functions. As needed, CIT can also provide cash advances against open receivables prior to collection.

What are the benefits of factoring?

Companies of all sizes, from startups to mature companies, realize a number of benefits from factoring:

• Improve cash flow
• Eliminate bad debts
• Reduce operating expenses
• Expand working capital financing
• Improve management information

What types of companies can benefit from factoring?

Companies that can benefit from factoring include those that are:

• Rapidly growing
• Seasonal
• Startups
• Undercapitalized
• Spin-offs
• Concerned about adding fixed costs
• Have a lengthy manufacturing cycle
• Strained by slow turnover of receivables
• Hurt by high bad debt losses
• Saddled with a large customer concentration

Why use factoring?

• Credit protection
  The primary reason why companies turn to factoring is for protection against customer credit losses. Many companies are concerned about the credit worthiness of their customers. CIT keeps comprehensive credit files on approximately 300,000 customers so that it can determine which customers have the ability to pay for merchandise.

• Enhance collection efforts
  The second most important reason why companies turn to factoring is for the collection services that the factoring company provides. Since CIT collects billions of dollars of accounts receivable annually, it has relationships with retailers and manufacturers that may enable CIT to speed up the collection effort.

• Borrowing power
  Another important reason companies use factoring is for the benefit of borrowing against their accounts receivable.

• Comprehensive reporting capabilities
  With CIT, factoring clients have on-line, real-time access to comprehensive information about their accounts receivable. This is a valuable management reporting tool.

What does it cost?

There are two costs involved in factoring: the factoring commission and, if applicable, the interest charged on advances against receivables.

The factoring commission is quoted as a percentage of factored volume, and is based upon these variables:

• Factored sales volume
• Average invoice size
• Terms of sale
• Number and type of customers
• Ability to transmit and communicate information electronically

The interest charge is comparable to any short-term revolving credit interest charge. Interest is charged monthly at a rate tied to major interest rate indices based on the average daily amount advanced during that month.

How does factoring work?

This can be best illustrated in the following five steps:

Step 1
When a client enters a factoring relationship, the factor customizes an order submission procedure for on-line credit approvals via the client's computer. The factor establishes pre-approved credit lines for the client's customers. Most orders submitted electronically for these customers will be answered immediately.

Step 2
The client ships the approved orders to its customers and bills them, indicating on the invoices that payments are due to the factor.

Step 3
At invoice maturity, the factor collects from the customer and credits the client's account. The factor fully manages the receivables including the lock box, cash application and collection of past dues. Customer deductions or disputes over delivery terms or product are immediately reported to the client. The factor maintains the accounts receivable ledgers and provides this information either by paper reports or electronically via the Internet.

Step 4
In the event a customer defaults and is deemed financially unable to pay its debts, the factor pays the client 100% of the value of the approved invoice.

Step 5
As needed, the factor will provide clients with cash advances prior to the maturity date of the invoices. This allows the client to be paid upon shipment while actually offering credit terms to its customers. Typical advance rates are up to 90% of the value of the invoice. These advances are subsequently liquidated by collection proceeds from their customers.

Can factoring help your company? Take this test!