What is Factoring?
Factoring is the name given to financial services that use short term loans to businesses. The businesses usually have a sizable outlay of capital that goes along with delivering their products or services. These expenditures are typically covered when the invoice is paid by the recipient of the products or services.
Since in most cases payment terms are agreed upon in advance, there may be a 30 to 90 day delay before the provider business receives payment. As more and more orders for products/services are received, the outlay of capital approaches a limit set by the business operations. With the outstanding receivables not yet due or received, the business must find other ways to meet operational expenses.
Enter Factoring financial services. Factoring companies provide short term loans to these businesses to help them maintain proper cashflow to meet their operational expenses. Usually the loans come due in 90 days or less. Loans are secured by the contract for payment (e.g. the invoice to customer) being held as collateral.
Why is Factoring important to SES Providers?
Businesses that typically rely on Factoring financial services are usually in the shipping or trucking industry. Within the past few years Financial Services companies have extended their business model to include Supplemental Educational Services Providers. Because SES Providers usually have a contract with the School Districts which they serve, the invoice for tutoring services becomes a reliable element of collateral that can be used to secure a short term loan.
The Factoring service loan helps the SES Provider meet their expenses including rent, utilities, insurance and salaries while waiting the 30 days or so for the District to reimburse them for the tutoring services they have provided. When the District releases the monies they are paid directly to the Factoring services company which, in turn, recovers their part of the loan then releases any outstanding funds (less a small percentage service fee) to the Provider.
Is Factoring right for your SES business?
“We factor all types of businesses on a daily basis to the tune of $300M a year,” says Trent Shepard of Aero Fund Financial, the leading resource for Factoring for SES Providers. “For SES Provider companies, whether we can factor with them depends on whether the school district will allow it. To date we have only had two school districts (in the country) that do not work with factoring companies,” continues Shepard.
Shepard notes that in a factoring scenario, the contractual relationship between the District and the SES Provider remains undisturbed. “Keep in mind you are not assigning the contract,” says Shepard. “You are simply changing the remit address to our address and keeping your name on the payment.” Once the factoring company has verified the invoice with the District, factoring monies can be disbursed. Usually verification is done via a phone call to the District, but “In the case of a school using the Cayen system, we can verify by logging onto the Cayen system,” finishes Shepard.
Factoring is an excellent way for SES Providers to maintain their cashflow while meeting the operating expenses in providing services to school districts. Aero Fund Financial is the leader in providing such loans to SES Providers. Aero Fund Financial has been loaning to Provides for more than 5 years and they have an in depth understanding of how the SES business works.
For more information contact ODDTech SES @ 614.946.9541.