by Connor G. Schiffman
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 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%.
You can get a back-office support from a factor. Once the factor collects all your debts, you will be given payments from reserve invoice balances though a fee on collection risk will be deducted. Financing is advantageous because you will not await payments for months making it possible to grow and run your business smoothly. The method used in this funding differs significantly from mainstream loans and does not undertake loans. The provided finances are not restricted and hence give flexibility to companies.
There is existence of various reasons on why this type of financing stands out as the most favorite funding tool. One of the major advantage is that it provides a boost to cash flows. Majority of financial institutions are likely to give you the loan within a day. With this, it becomes possible to solve short-term hitches on cash flow and ensure a steady growth of your enterprise.
This type of funding has existed over the years. It can traced especially during international trades. England had adopted this funding method as early as the 1400s. By 1600s, the pilgrims introduced it into US. Like other financial tools, factoring has also seen its part of evolution.
All companies regardless of their size or type can adopt financing as a method of increasing their cash flow. Firms use the funds that are generated through financing to pay up for inventory, add employees, buy new equipment, expand operations and pay for all other expenses incurred in operating a business.
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 Invoice Finance he recommends you check out www.receivablefactoring.net.