Factoring companies can surely help businesses with their cash flows dilemma. We’re not kidding. They really can and today we’ll help you get to know more about the services they offer and what makes them one of the business industry’s top financial sources!
Factoring is a type of financing wherein a company sells its right to collect against its accounts receivables or invoices to a third party at a discount in exchange for an advance of its value.
Because many businesses offer sales on credit, it cannot be denied that cash flow problems can occur if customers do not pay on time or at all. Even with penalties and interests, cash will still be locked up in invoices making them unavailable for use up until the customer pays them. Factoring fixes this.
What it does is that it allows the company to draw immediate funds from the invoices in even as fast as twenty for hours. The advance it is able to draw against the provider is equal to a majority percentage of their total value, often ranging from eighty to ninety five percent, with the remaining balance forwarded and discounted of the fees after the factoring facility has fully collected from the owing customer.
Its charm lies in the fact that it does not create a loan unlike other financing methods. The company in essences sells its asset as it gives the right to collect against such invoices at a future date. Because of this, liabilities remain the same and only the asset side of one’s balance sheet is affected. A rise in cash occurs alongside a decrease in trade receivables. As mentioned earlier, it is a sale of an asset which is your receivables and not a debt.
It is also immediate in nature and is not coupled by the same long and meticulous application process involved in bank loans, mortgages and similar other forms of finance. This makes it a good source of immediate financial resources allowing a quick injection of cash into the system. Because of this, working capital is strengthened and cash flows are improved.
Moreover, factoring companies can help businesses improve their collection function. With the sale of the invoices comes the responsibility of payment collection. The factor now has that burden and therefore relives it from the company. These facilities are known to have well developed protocols and programs to improve such function so businesses are rest assured that customers are dealt with accordingly, in schedule and appropriately.