Factoring or accounts receivables financing is rapidly gaining in popularity due to its unique nature. A number of people still have difficulty understanding the way factoring works and in this article we are going to look at some of the areas that people seeking to understand factoring usually probe.
What Is Factoring?
Factoring is a transaction which allows a business to access immediate financing by disposing its invoices or accounts receivables. The transaction is carried out between the business and financial companies which in this case is referred to as a factor. This brings forward the maturity of the invoices which would ordinarily be paid after 30 to 60 days by the customer. For businesses to wait this period for the realization of the payments might sometimes mean unpaid salaries, suppliers etc.
There are a variety of factoring options depending on the industry and the concerned factor. It is however common practice among many factors to advance the cash to the business within 24 hours of the initial application. The money that is given to the business is between 80 and 95% and factors that influence this include the specific industry concerned and the credit histories of your customers. The factor will from that point on assume some of the functions of your back office in that it becomes their responsibility to collect on your invoices after which they pay you the residue amount. This will of course be less a minor fee for the assumption of risk. It is not a loan, but a cash advancement which is flexible in terms of its terms and the values that you can deal with.
How Can The Whole Factoring Process Be Summarized?
This is how factoring can be broken down into clear and concise steps.
1. It starts when you perform a service for your customer or sell pa product on credit
2. You then write an invoice and send it to the customer
3. You approach the factory and get a cash advance
4. The factor collects on your invoices
5. You get to receive the balance of your invoice amount less a small fee
What Are The Benefits Of Factoring?
There are numerous benefits that factoring brings to the business environment the most important of which is the quick boost that is visited on the cash flow. Businesses dont have to reel under the stress of short term cash flow problems. Another distinction of factoring is that it is not a loan and therefore does not feature loan burdens such as repayment or interest payments.