What are accounts receivable? What is factoring?
As Doug Foshee explains, factoring is a tool that will allow companies to gain access to their emerging growth capital from their Balance Sheets.
Most people describe factoring as selling problematical debt but this is not the case.
Some clients may have factoring financial challenges, their customers must still establish their creditworthiness in order to support an advance on any invoices they wish to acquire their invoice. Work will have to be verified and accepted before moving forward.
Now there are 3 parts to a factoring transaction; that being the Advance, the Reserve, and the Fees one would pay. An advance is the amount of the invoice this will be wired to your bank account once everything has cleared and is verified, this is usually around 80%. As for the reserve, this is part of the money that is held back until the customer pays the invoice and at this point, any fees will be deducted with the remainder of the reserve sent to you the customer.
The cost of factoring services charges are always used to cover the cost of checking a customers ‘credit, you will be notified and receive verification once the invoice is paid. This includes providing the advance, payment, monitoring, and calculations or the reporting reserves and fees on a more than regular basis. The better factoring companies are will to go one step further by providing guidance and support with any necessary help you may need to help your company grow.
Factoring is supposed to be looked at as a temporary financial tool that can be used until your business has built up enough to qualify to receive conventional lending from a bank.
Some of the benefits are it can be set up fairly quickly without you having to do too much paperwork, it also has the flexibility to keep growing as your invoicing increases.
Factoring involves specialized services that are in relations to credit investigation, collection of debts, sales ledger management purchase, and this is all part of a finance provision against receivables and risk bearing, When it comes to factoring, the accounts receivable are normally sold to a financial institution, who then changes a commission and takes all the credit risk that is associated with the purchase of a receivables account.
When selling a receivable account to a third party for discount prices is considered a factoring, this is to help improve cash flow. When you receive the value it is generally a function of the financial strength.
Even if the debt is good, bad, or ugly; the only difference will be the value received.
Banks do finance receivables but this perk is only available for short period of time and the seller has to take on all the risk in case debtors decides not to make good on his payment.
When it comes to receivable management it requires a special touch and this process can take up a lot of time on the firm’s end. When it comes to the collection of receivables this often poses problems, particularly for the smaller and medium size organizations. Banks will offer finance receivables but this will only be for a limited period and the seller has to take all the risk for the off chance the debtor’s default on payment.