| Business Factoring Can Be Truly An Edge For Business Owners |
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| Written by Jack Bennington |
| Friday, 14 May 2010 15:27 |
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Business factoring is a type of financial service where a firm sells or transfers its accounts receivable to a factoring company, which then becomes the principal and not an agent.
Business factoring is a type of financial service where a firm sells or transfers its accounts receivable to a factoring company, which then becomes the principal and not an agent. Factoring is quite different from a bank. Bank loans are between the bank and the debtor, whereas factoring is between three different parties, the company, its debtor and the factor. Unlike a bank which looks at the credit worth of the debtor, factoring is only interested in the amount to be recovered. The credit worthiness of the business has no importance in factoring. Banks and financial institutions form alliances to become a factor. They offer a mix of various expertise to the client. This way they are offering multi-specialty services all via one channel. The biggest advantage of factoring is that it can offer money in bulk. This can be very handy as it increases the cash in hand. This is very useful for those businesses that work with small working capital. Factoring has lately come up as a very profitable business as the factor is buying an asset and not a liability. A number of players in the market have made the rates very competitive. Factoring is a type of outsourcing wherein the business sells its accounts receivable to a factor. This reduces the effort and labor required to recover money from the customers. The time saved can be utilized in various other business activities that need your personalized attention. Also, in factoring there is immediate incoming cash that can be recycled. However, all is not smooth in this business too. A discount means an obvious reduction in your profits. Also, when you take in a factor, it reduces your scope for borrowing money from the market or bank as it shows in the books as a debt and reduces your credit worthiness. Also, ending a relationship with a factor may be cumbersome, if there are still customers who have not paid yet. There may also be some customers who would prefer to deal directly with you and not with a factor. Such objections etc have to be handled with lot of care and caution as managing customer relations can be a very precarious situation. There may also be some customers who show an inclination to migrate towards the factor in turn. Adequate caution has to be taken to keep the reins in your hands. Another factor that cannot be ignored is that the factor has its own organizational culture. When any organization acts as your organizations representative they have to reflect your culture to your customers. The customers may take the factors actions as your actions and be slighted. So, while taking in a factor is a good idea, measure its advantages and disadvantages adequately before venturing out for business factoring. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. When it comes to knowing information about factoring companies, you need to consider using the net as the number one source. The factoring business can be a perfect income and way to run the companies production. |