Factoring For Better Growth
Factoring is a financial transaction whereby a business sells its accounts receivable, that is the invoices it has raised, to a third party commercial finance company, called the factor or factoring company, at a discount. This is to tide over certain immediate cash needs which arise before the invoice can be paid because there is usually a credit period extended of 30 to 60 days to the customer.
Which industries resort to factoring?
Industries that have long receivables like clothing industry, freight carriers, resort to factoring for their cash needs.
Industries that generate a lot of invoices also would do well to go in for factoring, reducing the time for receivables.
What a factoring company does
The business raises an invoice. The factor agrees to buy the right to collect the amount of the invoice from the business’ customer, and pay the business a discounted amount. The discount ranges from 2 to 6%. 75-80 percent of the discounted amount is paid immediately to the business, and the remaining after the it has collected the invoice amount from the business’ customer.
Why are factoring companies useful
· They provide the immediate cash in return for your invoices for long receivables
· They also provide services like accounting work, credit checking and generating financial reports.
· Most of them help businesses which are going through rapid growth, and which for some reason may be turned down for bank loans. Such a stage in the business cycle requires cash for operations.
· Factoring companies help businesses make the transition to traditional financing.
What are some of the precautions that factoring companies take
Since it is a receivable, and they have already forked out the cash for invoice, there are a few precautions factoring companies take before signing on businesses:
· Business needs to be at least one year old
· Needs to have a minimum annual sales to qualify
· They only fund certain industries
· They don’t fund past-due receivables.
· Some form of guarantee is taken from the business to affirm their integrity.
· They report to the personal credit bureau – which is a service that acquires data from them to offer an assessment in the form of a score, of the credit history of the individual or business in question, adding to the credit bureau’s databank.
How to search for a good factoring company
A factoring company is a funding partner and as such important contributor in your business success. So it makes sense to get a thorough professional in the field. Here are some tips:
1. Pay attention to the charges. Apart from the discount, take note of the advance fees and factoring fees and also any additional charges that may not be clear upfront.
2. Good interpersonal skills and customer service. Since the factors will be communicating directly with the business customers, the business owner should ensure that they will maintain the customer relationship and also provide good customer support to the business itself.
3. A factoring company is preferred who does business with clients in the same industry as the business owner. The business owner should be aware of what factoring companies that fund his line of business have to offer by way of services.
4. Above all integrity of purpose and in functioning.