The Business Factoring Basics For Companies In Need Of A Cash Flow PDF Print E-mail
Written by Jack Bennington   
Saturday, 03 July 2010 11:57
Business factoring is a fast and cost effective means of generating cash flow for a business. This is a tool by which a company sells its invoices to a third party, known as the factor, for instant cash. This article will help you understand the basics of business factoring and decide if this is the option for your company or business that is looking for a cash flow injection.
by JackBennington


Business factoring is a fast and cost effective means of generating cash flow for a business. This is a tool by which a company sells its invoices to a third party, known as the factor, for instant cash. This article will help you understand the basics of business factoring and decide if this is the option for your company or business that is looking for a cash flow injection.

Factoring differs from a bank loan in that it is not a loan, but rather a sale of assets. There are three parties involved in this transaction unlike a loan which just involves the party taking out the loan and the bank. In deciding whether to buy invoices, a key consideration is how much the invoices are worth. The creditworthiness of the company is not so much an issue in the whole process.

Factoring is unsuitable for businesses that sell to the general public. It is a tool that is more suited to those that sell commercially. There are some other characteristics that determine a corporation's suitability for factoring. More than a third of its income cannot come from one single account and the company should not have too many small invoices.

Another consideration that makes a company unsuitable is, having a large number of complaints lodged against it. It will also be difficult if the entity cannot finish orders in a timely fashion or fails to meet consumer demands.

Once a sale of invoices is made, the factor assumes the responsibility of making sure they are paid up. Consumers will pay money owed directly to the factor and in instances of non payment, where the bad debt falls will depend on the type of agreement signed.

Some of the advantages are that you can have more time to concentrate on your business as the inflow of cash from consumers taken off your hands. You can also protect yourself from bad debts if you enter into a non recourse agreement. This means you will not be liable for invoices that are not paid off. The factor can also provide you with advice on how to grow your business and information about the credit ratings of your clientele.

However, ending an agreement may be a process that is fraught with hassle. Some consumers may not like dealing with the third party and how the third party treats them, will reflect on your business. The cost of hiring a factor will take away from the profit that you make on each sale.

Overall, it is important to choose the right factor to sell your invoices to as you will be committing to a long working relationship. You want a reputable company with good practices as they will be dealing with your customers. Business factoring can be a cost effective means of raising money if done right. Furthermore, it can be a useful strategy in expanding your business.

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

There are several avenues open to the small business owner who is trying to improve the company's cash flow. One of these is factoring business. We've got the best inside scoop on factoring companies .