Factoring - An Effective Business Finance Tool
Invoice factoring, also known as receivable factoring
, is a financing tool that has been practiced for centuries. During that time the practice has adapted to changing conditions. It is still considered an excellent way for many businesses to convert their receivables, an asset, into cash flow.
What is Factoring? It's a financing method that helps smaller cash hungry companies to sell to larger more credit worthy companies. This technique allows small business to use their receivables to improve their cash flow without waiting for payment. This technique allows these businesses to expand sales without worrying about cash flow.
How It Works The factoring process does not produce a loan. Rather then become collateral for a loan, the receivables are simply sold at a discount. An advance payment of 70% - 90% is provided upon completion of the sale. The balance of the sale price is released when full payment is received, less a small fee. The risks and responsibility for collection passes to the factor company at the time of the sale.
Who Uses It? Many businesses that sell to other businesses, or who sell to the government use invoice factoring. Businesses that need a higher cash flow, such as newly developed businesses, fast growing businesses, and businesses selling on credit terms may find this technique useful.
Benefits The primary benefit of receivable factoring is to quickly increase working capital. This allows cash hungry businesses to focus their resources on growth and business opportunities. A secondary benefit is that resources previously used for collections and tracking receivables can now be used more productively. Another benefit of this technique is that it is much quicker and less labor intensive than a bank loan. It does not require a great deal of time or paperwork.
Advantages No debt or payments are added Minimal paperwork is required Cash can be generated quickly - 24 hours vs. 60 days Basis for credit is the customer, not the business Process benefits the credit rating and balance sheet
In a difficult economy, credit can be tough to obtain. As a result working capital can limit growth. Invoice factoring makes use of a hidden asset - receivables, to boost cash flow. This technique can allow cash hungry businesses pursue sales and growth even in tough economic times.
by: Leo Kease
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