subject: Invoice Factoring A Useful Financial Practice [print this page] In this age of cut throat competition, many times companies start to experience cash crunch if their invoices are not paid as expected. In such a scenario, financial factoring can be an extremely useful option for companies reeling under financial crisis. It is the practice of selling unpaid invoices to third party invoice factoring companies at a discounted rate in return of immediate payment.
Financial factoring is a win-win practice for both the seller as well as the factoring company. It enables the seller to generate the much needed cash flow for their company, and once the invoices are collected by the factoring companies even they observe profit. If a factoring company agrees to buy a sellers invoices, they take the responsibility for collection of payments and the risk of nonpayment is also theirs. If the deal on invoices is agreed by both the parties, the debtors are informed about the same and are asked to make the payments to the factoring company. Factoring companies take full responsibility of collecting invoices thereby saving the seller from the hassles involved in collection on unpaid invoices.
Although financial factoring is a great option for generating revenue, it has some limitations as well. When a factoring company is contacted by a seller, they assess the probability of payments based on the creditors previous credit history. Factoring company may reject the offer if they find the probability of the bills being paid too low. Usually invoice factoring companies do not purchase invoices that are more than 90 days old as such invoices are handled by collection agencies. Another limitation of financial factoring is that companies with very low margin of profit find it hard to give the percentage of discount on invoices factoring companies ask for. Furthermore, factoring invoices can hamper the reputation of your company among customers and suppliers.
Even though financial factoring has some limitations and drawbacks, it is a great method to generate capital which can be used to fuel the business.
by: Israil Khan
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