Factoring means an amount of transaction where a company sells off their invoices to an agency in charge of giving factor. These agencies present their clients their necessary sum of money to keep their cash flow going. And in return, collect all dues from customers as per their client’s invoices. In some ventures, this kind of service is also known as factoring accounts receivable.
Breaking down the explanation:
Factoring services assist companies to free up their capital that is stuck as dues or unclear payments. They thoroughly go through your business invoices and cover up around 70-80%, sometimes even 90% of the outstanding.
On receiving the dues, these factoring agencies clear pays of their clients (companies taking their help). From that recollection amount, they subtract a small sum as their service charge, which is also known as factoring accounts receivable fee.
When collecting the pending amount, factoring companies consider numerous aspects into consideration. They determine the exact amount they need to pay off to their clients (company taking their service).
Interestingly, old invoices are less valuable in comparison to the new ones. The way these factoring company experts explain is - If a bill is easy to collect, it is of more value and if it involves difficulties, then it is of less value.
Types of Factoring accounts receivables:
There are 2 kinds of factor. One being recourse factor and the other being non-recourse factor.
1. Let’s start off with non-recourse factor. Here you sell off your invoices to a factor agency. On receiving the amount, they examine each of the risks involving credit collection and acquire the payment from your customers.
2. On the contrary, recourse factor is when you submit a factor agency your invoice and even if they are not able to collect the dues, they pay you off themselves.
With factoring, there is no need to wait for your customers to clear off the dues!
One of the main reasons why most modern day business owners cater to factoring accounts receivables is due to quick cash receivables.
There is no need to wait for a month or 2 (which is necessary for a normal bank loan). All business heads need to do is submit their invoices to these factor agencies. And within a day, the amount is sanctioned.
This in many ways is great for corporate start-ups. Take for example-
If you are a business runner and every month, your average receivables are around $50,000. If there is any sort of delay from your customer’s side, you don’t possess anything to show at the completion of a month.
But if you have a factoring company to accommodate your cash flow, it is a guarantee that you will get the amount almost instantly. As these agencies cover up around 70-80%, it means that you have $35,000- $40,000 in your account- RATHER THAN NIL!
This works as a benefit to many business runners and that is why catering to such factoring accounts receivable companies are so widespread. So, if you want to cater to such facilities, you should look up online. Shortlist a few names, check their years of experience, read their client testimonials and choose one who seems suitable for you.