Maybe you have heard about Factoring or maybe you haven’t. Either way, you better read up and get to know more about it. Who knows, it might just be the solution that you have been looking for to better your company’s operations. Okay, so let’s get started and discover how Invoice Factoring companies work their magic to help businesses, small and big alike.
But first, what is factoring? It is a kind of receivables financing method apart from discounting that seeks to derive funds from the company’s receivables and customer invoices by hastening their collection. Now who wouldn’t want that?
A company in its usual operations and trade sells its products and/or services either in cash or in credit. In the latter, this is referred to as trade receivables and is contained in the customer invoices. There is a sale but the receipt of cash isn’t always spot on. When sales are on credit it can take for weeks to months before full collection is attained. In some cases, the owing clients even default in payment, others late while others not at all. But the company may have the need to get hold of the cash locked up in such invoices for several reasons. This is where factoring steps in.
The business sells its customer invoices, a corporate asset, to a financial institution often referred to as a factoring company or simply a factor. The factor in turn gives the selling company an advance which is equivalent to a major percentage of the value of the sold invoices. This can be for as high as eighty to ninety five percent in value.
Another perk of such financing method is that the business is freed up and relieved of the collection process as the factoring company takes charge and holds the responsibility of collecting from the owing clients. Upon complete collection, the factor will give the company the remaining balance of the value of the invoices less the discounts and fees that both parties have agreed upon at the onset. In essence, factoring involves the sale of the customer invoices and the right to collect against them.
The services of factoring companies can be divided into two: bulk or single invoice. In the former, the company sells off all of its invoices and pays a monthly fee. The latter on the other hand is more of a one-time transaction only but should a company wish to use it again then they can do so and the fees involved are only attributed to the invoice at hand.