| Be Familiar With The Rudiments Of Business Factoring |
 |
 |
 |
| Written by Jack Bennington |
| Thursday, 01 July 2010 17:59 |
|
A common financial transaction that many people are not aware of is business factoring. This type of transaction occurs when a business will sell their accounts receivable or invoices to a third party which is normally called the factor. The sale occurs at a discount as the business needs to get some cash fast and is normally used when a cash balance period is low or below average.
A common financial transaction that many people are not aware of is business factoring. This type of transaction occurs when a business will sell their accounts receivable or invoices to a third party which is normally called the factor. The sale occurs at a discount as the business needs to get some cash fast and is normally used when a cash balance period is low or below average. Factoring is quite different from a loan as this transaction does not require any money to be paid back as you are paying for a specific product. Also most loans are based on a company's credit worthiness and this is not how factoring occurs as factoring is based on the receivable values. A loan is also between two different parties where as factoring is between three. The three different parties found in this transaction is the factor, the receivable and the debtor. The business will sell the invoices at a discount to the factor and the cash can then be used to pay of the debtor. Factoring is used when the business does not have any cash to meet its financial obligations. This can be used for immediate cash needs and reducing the amount of the cash balance. Much of this transaction centers around the company's cash flow as there can be different time periods in which the cash flow is large and than others when the cash flow is much smaller. Factoring can only help when you need to increase your cash flow for the short term. Much of your cash flow will depend on how it can actually fluctuate for your company and how long your cash flow is low. Many companies are using factoring more frequently as it is becoming much more difficult to get a loan through the bank. Though you do need to be aware of some of the disadvantages as factoring will cost more than receiving a loan and you also have to deal with blanket lien. A blanket lien occurs when the third party that bought the receivable has a legal interest. This lien can make getting other financing difficult. The type of discount that is generally given for factoring is between 2 to 20%. When the entire transaction is done you can expect to receive about 80% of the face value of the invoices as there are other fees that will need to be paid. To have the transaction proceed as quickly as possible you should have all relating paperwork at hand for the factoring company so they can verify all information. If your company should need some money in less than 60 days than you should consider factoring to raise the necessary funds. Generally small or medium companies will sue factoring and some of the things that will be involved in include how much money you need, the credit worthiness of the buying company, your invoice diversification and what industry you are in. Basically a factoring company is a type of credit lender and the concept of factoring has been used for a long time. Many people have gotten an advance on a paycheck before. Factoring is one such type of transaction. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Factoring business is a specific financial transaction type. This occurs when the invoices or accounts due are sold to a third party. We've got the ultimate inside info on factoring companies . |