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%.
The factor will also give you back-office support. Once it makes collections from your clients, the factor will pay you the reserve balances of invoice minus a fee for assuming collection risk. Factoring is very beneficial in that rather than wait for one or two months for payments from a customer, you can acquire cash to operate and develop your business. Factoring is different from a loan and no debt is assumed through financing. Funds are unrestricted and provides a firm with more flexibility compared to traditional bank loan.
There are various reasons as to why factoring stands out as a valuable financial tool for most businesses. The main benefit is that it provides a quicker boost to cash flows. Majority of the financing firms provide cash within a 24-hour duration. Through this, short-term cash flow hitches are easily solved and the growth of the business is ensured.
Factoring is a type of funding that has been existences over millenniums. It is believed to have originated from early international trades. The method was adopted in England in the early 1400s. The pilgrims later introduced it to the US in the 1600s. Financing continues to evolve just like other financial tools.
Companies irrespective of type or size can opt this financing method in order to boost up their cash flow. The funds generated by financing are used by companies to settle inventory costs, employ new staffs, add new equipment, widen their operations and cater for all operational costs.
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%.
The factor will also give you back-office support. Once it makes collections from your clients, the factor will pay you the reserve balances of invoice minus a fee for assuming collection risk. Factoring is very beneficial in that rather than wait for one or two months for payments from a customer, you can acquire cash to operate and develop your business. Factoring is different from a loan and no debt is assumed through financing. Funds are unrestricted and provides a firm with more flexibility compared to traditional bank loan.
There are various reasons as to why factoring stands out as a valuable financial tool for most businesses. The main benefit is that it provides a quicker boost to cash flows. Majority of the financing firms provide cash within a 24-hour duration. Through this, short-term cash flow hitches are easily solved and the growth of the business is ensured.
Factoring is a type of funding that has been existences over millenniums. It is believed to have originated from early international trades. The method was adopted in England in the early 1400s. The pilgrims later introduced it to the US in the 1600s. Financing continues to evolve just like other financial tools.
Companies irrespective of type or size can opt this financing method in order to boost up their cash flow. The funds generated by financing are used by companies to settle inventory costs, employ new staffs, add new equipment, widen their operations and cater for all operational costs.
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 Working Capital Finance he recommends you check out www.receivablefactoring.net.
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