The process of factoring is not new, and it has been a standard for businesses of all sizes when there are insufficient funds in the company account to make payroll and to meet obligations, but the company has invoices outstanding that can cover this amount.
In some industries, particularly in the clothing and textiles industries, factoring is an established practice with all companies, even those that have sufficient cash on hand taking advantage of retaining that money as a cushion. The actual daily financial needs are met through factoring, giving the company the opportunity to take on new business as needed from their banked funds.
Through the process of factoring accounts receivables, the business sells some or all of their accounts receivables to a factoring company. The factoring company provides a lump sum of cash which is used by the company to cover their immediate needs for cash for payroll, overhead, materials, or other necessities.
Managing Accounts Receivables
When companies have a lot of invoices, especially when there are different terms with different customers, using a factoring company is also a benefit to consider. The factor takes over the back office duties, ensuring that invoices are paid and maintaining all communication with the customer, freeing the company up to focus in on its own ongoing business opportunities.
This also allows the factoring company to serve as the financer for the customer, not the business, which also gives the business opportunities for investment and growth not possible without factoring.
When factoring accounts receivables, there are two different options to consider. With recourse factoring, the factor is not responsible should the customer default, rather the business is responsible for the bad debt. With non-recourse factoring the factor is responsible for bad debt issues and the business is not. A partial recourse or partial non-recourse option may be available.
When factoring accounts receivables the seller, or the business, can expect to have up to 90% of the price of the account factored. This is sometimes known as the advance , and the factor then collects the invoice, deducts the fee, and forwards the balance to the company.
It is also possible to consider maturity factoring, which averages the dates of maturity of all the accounts receivable sold and then provides the purchase price on that date. For most businesses, advanced factoring is more effective and provides them with the operating capital they need.
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