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.
Terms and nature contained in factoring differ in many ways with those of several providers of financial services. These factor firms usually buy your invoices and offer you the desired amount of money in a short time period. The rate that they give is normally at 80% to 95%, depending on repayment history of your creditors, the industry and several other criteria.
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.
Several reasons exists as to why factoring comes top as a profitable financial tool for majority of businesses. The key advantage is that it gives a quicker boost to flow of cash. Most financial institutions offer cash within a day, and this is something that solves problems on short-term cash flow while ensuring steady business growth.
This kind of funding is not actually a new thing as it has existed for centuries. Its origin can be traced in international trade among countries. As early as 1400s, it was the norm of doing business in England, it was introduced into America in the 1600s by pilgrims. Just like other financial tools, it has also evolved over the years.
Firm can opt for this financial tools to boost their cash flow irrespective of their size or type. The funds provided find useful usage in in settling costs on inventories, employing new staffs, adding modern technology, widening operations and catering for other 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.
Terms and nature contained in factoring differ in many ways with those of several providers of financial services. These factor firms usually buy your invoices and offer you the desired amount of money in a short time period. The rate that they give is normally at 80% to 95%, depending on repayment history of your creditors, the industry and several other criteria.
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.
Several reasons exists as to why factoring comes top as a profitable financial tool for majority of businesses. The key advantage is that it gives a quicker boost to flow of cash. Most financial institutions offer cash within a day, and this is something that solves problems on short-term cash flow while ensuring steady business growth.
This kind of funding is not actually a new thing as it has existed for centuries. Its origin can be traced in international trade among countries. As early as 1400s, it was the norm of doing business in England, it was introduced into America in the 1600s by pilgrims. Just like other financial tools, it has also evolved over the years.
Firm can opt for this financial tools to boost their cash flow irrespective of their size or type. The funds provided find useful usage in in settling costs on inventories, employing new staffs, adding modern technology, widening operations and catering for other 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 Invoice Factoring For Small Business he recommends you check out www.receivablefactoring.net.
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