Factoring in business finance is a transaction, in which a business offers its invoices or accounts receivables for sell to a factor or a third-party financing company. Factoring is sometimes referred to as accounts receivable financing. Numerous small and medium size enterprises have resorted to using this means of financing to get quick cash liquidity, as opposed to waiting 60 or 30 days for their customers to pay up. In most cases, the factor financing company will avail the funds within 24 hours. This quick money can then be put to work immediately upon receipt; for instance, the money can be used to buy new business equipment or enlarge a business. The terms of factor financing can be dictated by a number of factors, including the terms of service set by the financial service provider and the type of industry.
How factor financing works
The best factoring companies process begins when a small, medium or large business entity performs some work for a customer. The business then send its invoice to a factoring financing company. The factoring company then gives you the agreed cash in advance, based on the approved invoice. Next, the factoring company goes ahead to collect the full payments from the customer. Lastly, the factoring entity offers you the remaining invoice amount, excluding the agreed collection fee.
It is important to note that advance rates in factor financing can reach as high as 95%, depending on factors such as customer’s credit history, type of industry and other well-informed determination criteria’s. The decision on which invoices can factored for financing lies squarely at the hands of the business owner or the decision maker. Some businesses may opt to factor only the invoices that take long periods to be paid, while others may choose to factor all the invoices being awaited. This decision can also be made based on the amount of money a business expects from a given invoice or invoices.
The benefits of accounts receivables financing
One great thing about factoring is that by its own definition, it is not the same thing as a loan. For this reason, you do not assume any debt when you choose to use this form of financing. In certain cases, if the factoring company is flexible enough with its financing, the funds provided may be unrestricted. Some factoring financing parties can go beyond their call of duty to furnish you with critical credit card report and other pertinent information relating to your current and potential customers.