Factoring Your Appraisal Invoices
Cash flow is the most important part of running a business.
You could be asking yourself, what about industry expertise and skills, market knowledge, integrity, relationship building and more? It’s true, these are important aspects of business, but not as important as cash flow. An appraiser can possess all of these skills, but if the collection process is not happening as quickly as it should be, the business will suffer and possibly even gain unwanted debt. Slow cash flow can limit the ability to pay operating expenses, grow quickly, and focus the limited amount of time we have where it really matters. Cash flow is the critical key to success for both new and established appraisal businesses, and factoring your appraisal invoices is how that can be accomplished.
So how do you speed up the payment of your completed orders?
One option is to create well established working relationships with Appraisal Management Companies (AMCs) and financial institutions that pay appraisers within a reasonable amount of time for complete, approved work. However, an appraiser will realistically have many relationships with various AMC’s and lenders that pay at different times. The time it takes for each of these entities to pay for completed work varies from 10-90 days. In some instances, collection of an invoice can take even longer than 90 days.
Since not all AMCs and lenders pay invoices within the same time frames, the next best solution for you as an appraiser, is to increase the rate at which cash flows back to you by factoring your appraisal invoices.
What is factoring?
Factoring (also known as invoice discounting) is selling your completed orders to a Factoring Company to get paid quickly for the work you have completed. When an appraisal order is completed you are presented with two different options. One, you can submit the invoice for payment directly from you to your client and wait for an average of 30 days to be paid. Or you can send the invoice to the Factoring Company for accelerated payment for a small fee. For example, you have a completed order with a value of $450 you choose to sell to the Factoring Company. The Factoring Company may purchase the order for $427.50. In this example, the receivable is discounted by 5% or $22.50 which is the factor fee. Payments for completed orders are typically made as quickly as the same business day.
Factoring is a solution preferred by many businesses to improve their cash flow and working capital over taking out a loan to cover business expenses or promote business growth. Factoring also allows appraisers to have a more predictable cash flow in their business even if they are working for a wide variety of lenders and AMC’s who are all on different payment schedules with different payment terms. With factoring, appraisers can be paid for completed work as quickly as the same business day and can avoid having to go through lengthy collection processes.
How can an appraiser start factoring their invoices?
An application to factor can typically be reviewed and approved within a couple of days (depending on the Factor). To secure the accounts and to ensure that the debtor pays the Factor for purchased invoices, a Factor will take a security interest in the accounts.
Do Factors offer their services for all AMCs and lenders?
No. Each factor has their own rules and criteria to determine which AMCs and lenders they will factor orders for. This is determined by an AMC or financial institution’s historical ability to repay the appraisal invoices and how long it takes them to pay for their orders.
After the appraiser has been paid for their work, the Factor handles the collection of the order so the appraiser can get back to what they do so well, the business of appraising real estate. Since the order has been remitted to the Factor, appraisers don’t have to worry about calling, emailing, or collecting on the order. The Factor handles the collection process for them.
How to choose a Factor.
When looking for a Factoring company to handle the collection of your orders, it is important to know the difference between Recourse and Nonrecourse Factors. Recourse factoring means after the Factor purchases the invoice, the payment for the order may be charged back to the Appraiser if the Factor cannot collect the payment or the AMC or financial institution refuses to pay. Nonrecourse factoring means after the Factor purchases the completed order invoice, the appraiser has no liability on uncollected invoices. The Nonrecourse Factor absorbs all the risk for the collection of the account receivable, taking the risk of nonpayment away from your business.
Generating quick cash flow for businesses is the primary goal of factoring. By factoring your completed orders with a Factor, your appraisal business can grow, operate more efficiently, and can avoid collection of past due invoices and additional debt. By utilizing a Factor, appraisers can pay operating expenses on time and business owners can spend more time doing what they do best which is appraise real estate.