Factoring involves a type of transaction where a firm sells its invoices to a third person, referred to as a factor. This measure is usually taken to ensure a firm is in a position to get cash more quicker than wait for weeks or months for payments to be made. Accounts receivable factoring at times is referred to as A/R financing.
The nature and terms of factoring may differ among several industries and providers of financial services. Majority of the financing firms will buy your invoices and give you money within a very short period. Depending on the credit histories of your customers, the industry and other criteria, the advance rate may range from 80% to 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 needed to factor is usually based on uniqueness of the needs of a business. Some firm are known to factor all your invoices, but others factor only for clients who make delayed payments. The capacity of receivables that a company can factor may be between some few thousands and millions each month.
The nature and terms of factoring may differ among several industries and providers of financial services. Majority of the financing firms will buy your invoices and give you money within a very short period. Depending on the credit histories of your customers, the industry and other criteria, the advance rate may range from 80% to 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 needed to factor is usually based on uniqueness of the needs of a business. Some firm are known to factor all your invoices, but others factor only for clients who make delayed payments. The capacity of receivables that a company can factor may be between some few thousands and millions each 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 Factor Receivables he recommends you check out www.receivablefactoring.net.
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