Factoring is a kind of transaction in which a company sells its receivable, or invoices, to a third party (factor). The aim of taking this measure is to ensure that the business is able to receive cash at a quicker time than wait for a month or two for a client to make payments. Accounts receivable factoring is at times referred to as account receivable financing.
The nature and terms involved in factoring is quite different among various industries as well as financial services providers. Most financing firms tend to buy invoices and provide you with the required money within a short duration of time. Based on credit history of your customers, industry, among other criteria, the rate advanced lies between 80% and 95%.
A factor is likely to provide you with back-office support. Upon making collections from your debtors, a factor will provide you with payment of the reserve invoice balances and deduct a fee for taking a collection risk. What makes financing beneficial is that you will not have to wait long for payments from customers as you can get cash to run and grow your business. This funding method is quite different from bank loans and it does not assume debts. Funds are not restricted and will provide flexibility to a company.
There is existence of various reasons on why this type of financing stands out as the most favorite funding tool. One of the major advantage is that it provides a boost to cash flows. Majority of financial institutions are likely to give you the loan within a day. With this, it becomes possible to solve short-term hitches on cash flow and ensure a steady growth of your enterprise.
This type of funding has existed over the years. It can traced especially during international trades. England had adopted this funding method as early as the 1400s. By 1600s, the pilgrims introduced it into US. Like other financial tools, factoring has also seen its part of evolution.
All companies regardless of their size or type can adopt financing as a method of increasing their cash flow. Firms use the funds that are generated through financing to pay up for inventory, add employees, buy new equipment, expand operations and pay for all other expenses incurred in operating a business.
The amount that you need to factor is dependent on the unique business needs of your company. Some of the firms factor all invoices, while others just factor for those customers who take longer to pay. The volume of receivables a firm may factor ranges from some few thousand dollars to millions a month.
The nature and terms involved in factoring is quite different among various industries as well as financial services providers. Most financing firms tend to buy invoices and provide you with the required money within a short duration of time. Based on credit history of your customers, industry, among other criteria, the rate advanced lies between 80% and 95%.
A factor is likely to provide you with back-office support. Upon making collections from your debtors, a factor will provide you with payment of the reserve invoice balances and deduct a fee for taking a collection risk. What makes financing beneficial is that you will not have to wait long for payments from customers as you can get cash to run and grow your business. This funding method is quite different from bank loans and it does not assume debts. Funds are not restricted and will provide flexibility to a company.
There is existence of various reasons on why this type of financing stands out as the most favorite funding tool. One of the major advantage is that it provides a boost to cash flows. Majority of financial institutions are likely to give you the loan within a day. With this, it becomes possible to solve short-term hitches on cash flow and ensure a steady growth of your enterprise.
This type of funding has existed over the years. It can traced especially during international trades. England had adopted this funding method as early as the 1400s. By 1600s, the pilgrims introduced it into US. Like other financial tools, factoring has also seen its part of evolution.
All companies regardless of their size or type can adopt financing as a method of increasing their cash flow. Firms use the funds that are generated through financing to pay up for inventory, add employees, buy new equipment, expand operations and pay for all other expenses incurred in operating a business.
The amount that you need to factor is dependent on the unique business needs of your company. Some of the firms factor all invoices, while others just factor for those customers who take longer to pay. The volume of receivables a firm may factor ranges from some few thousand dollars to millions a month.
About the Author:
Connor G. Schiffman has 27 years of experience in commercial lending including factoring, asset based lending, and banking. Connor helps readers manuver through all the account receivable options providing practical and useful knowledge to better understand all your lending options. If you want to learn more about Factored Accounts Receivable he recommends you check out www.receivablefactoring.net.
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