A Glimpse Into Business Factoring | Investments

A Glimpse Into Business Factoring

Written by Jack Bennington

Saturday, 24 July 2010 11:45

by JackBennington

The history of business factoring can be traced back to before the fourteenth century. One of the earliest functions of factoring was to finance sovereign debt. Today, it has evolved as a tool for companies wishing to infuse their organizations with immediate capital for operational, purchasing or investment purposes.

In simple terms, the factoring process is one where an organization sells its accounts receivable to another organization (a factor) at a discounted rate. These are actual sales and are not to be confused with loans. If it were a loan, the accounts would be used as collateral against the money received. However in the case of factoring, the accounts are outright bought by the factor. Further, in the case of a loan the only parties involved are a seller and buyer. In this case, there will be another party: the party who owes money on these accounts (the debtor.)

The process is straightforward. The seller signs over all or some of its invoices at a discount to the factor for immediate cash payment. Once the transfer of ownership of the accounts receivables is executed, it is now the factor and not the seller who assumes the cost of any collection activity and the risk of loss if payment is not made by the debtor.

Figuring out how much a seller will get for the receivables is based on a few criteria. To start with, a percentage of the accounts' face value is agreed upon. Additionally, some amount of the invoice value may be placed in reserve until payment is made by the debtor. Lastly, there may be a service fee taken out of the reserve is the reserve gets paid back to the seller.

There are myriad reasons for selling off receivables. Some companies may have fluctuating quarterly cash flow situations. The use of factoring during those periods where cash flow is low can "even out" any spikes. Other firms, particularly in the textile industry, have demanding working capital needs (i. E. Inventory purchases.) Still other companies, who need to meet short term operational obligations, utilize factoring as a method for immediate cash infusion into the corporate coffers.

Prior to any purchases of accounts, a factor will want to carefully review the customers of a potential seller. This will also help them better determine what percentage to offer. The creditworthiness of the customers is if main interest. It goes without saying that assuming accounts that are held by customers with dubious payment records is a higher risk and many factors will turn such purchases down. Others, however, will buy the invoices regardless. In these cases, factors may opt to buy insurance for these accounts, in the case that payment is not made by debtors. They will usually offer a lower price for them as well.

Before engaging the services of a factor, a company should consider any possible negative ramifications that might arise. Any factoring transaction involves forfeiting a part of its assets. A careful analysis of the benefits derived from the receipt of immediate cash against the percentage loss of invoice value should be conducted. More subtle issues could arise in a seller's customer's eyes. The customer perception that the seller may be suffering from financial problems, and the customer may just not like being billed by a third party (the factor) with whom they have no relationship.

Business factoring can prove to be a strong financial tool for many companies. As a part of a sound, responsible business strategy, it can be pivotal to success and growth.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

For all of those that need more information on factoring business opportunities, you should look on the Internet. The factoring companies should be a good career that could help you get a good income.