| Important Information You Need To Know Concerning Business Factoring |
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| Written by Jack Bennington |
| Wednesday, 17 March 2010 13:39 |
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If your business needs to raise cash in a hurry, business factoring may be a process that is helpful to you. In this process, you will sell your invoices at discount to a third party, a factor, in order to raise cash so that you can continue in business.
If your business needs to raise cash in a hurry, business factoring may be a process that is helpful to you. In this process, you will sell your invoices at discount to a third party, a factor, in order to raise cash so that you can continue in business. Factoring is different from a bank loan, but it also does provide immediate cash. Factoring is based on the value of the invoices and not on the business's credit worthiness. Factoring is not though of as being a loan but a purchase of some financial assets from the company. A bank loan only involves two parties while factoring involves three. Factoring is not the same as forfaiting. The process of forfaiting involves selling one transaction while factoring involves selling all of the companies receivables. Forfaiting is a transaction based process while factoring is a firm based process. Factoring is also sometimes mistaken for invoice discounting. It is not the same. Invoice discounting is borrowing money with the accounts receivable being used as collateral compared to actually selling those accounts. In factoring there are three parties involved: the business that sells the accounts, the factor and the debtor. A debtor is a person owing money to a business that will be selling the account. The debt he owes is normally due to goods that were sold or service preformed for the debtor. The factor purchases the receivables from the seller at a discount rate. This gives the seller important operating capitol. When the factor purchases the account, they also get the risks and rights that are usually associated with receivables. If a debtor does not pay his bill, then the factor must bear the loss. The wise factor takes this into account in order to ensure that he still has a profit, even with this particular loss. Normally, the debtor will receive notification of the sale and billing will begin to come directly from the factor once the accounts are purchased. If a company sells their receivables to the factor, they must not collect payments from the debtor or they may risk being able to get further advances from the factor. When factoring transactions are made, an advance of a percentage of the face value of the invoice is paid to the seller. The percentage is mutually agreed upon. After the invoice is paid in full, the reserve amount or the remainder of an invoice is paid to the seller, less any fees due to the factor. The fee may include a service charge as well as interest based on the amount of time that the factor must hold the account in order to receive the debtor's payment. While business factoring has little effect on the debtor, other than to whom he writes his payment check, it can make a big difference to the business involved and the factor. The business can receive immediate cash that will allow them to continue. The factor will make a profit that is based on the difference of the price paid for invoices and money that came back from the debtor minus the amount that was lost to debtors that did not pay their invoice. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. Factoring business is a process that allows a business to sell its accounts receivable to a factor. We've got the inside scoop on factoring companies . |