One of the most appealing features of factoring service is, of course, the immediate funding options offered by it. Nowadays on average small businesses are more or less acknowledged to the term ‘factoring’ owing to the door of scopes it opens up for the small business owners. Once the small business matches the line of requirements established by the company the overall process is accomplished speedily. Moreover, it’s relatively easier to qualify for factoring services in comparison to the traditional bank loans. After that, the business is bestowed with the option to factor as many invoices as they want.
Factoring has become one of the widely used ways of funding capital for the businesses. Here is a sketch of the procedure described in simple terms for easy understanding of the novices.
• A business accomplishes the order of the client
• After that, the business invoices the clients.
• Next, the business sells the invoice to the factoring company at a discounted price.
• The factoring company renders cash for invoices immediately to the business house. The amount generally remains around 80 or 90 percent of the invoices.
• Then the customer directly pays the due invoice to the factoring company.
• Once the payment is received completely the factoring company handover the remaining balance deducting the interest charges and service fees.
Most of the small business owners have agreed to the fact, during economical crisis the factoring option turns out to be great help and an unfailing way of maintaining steady cash flow necessary for dealing with regular business operation. Besides this, it features numerous advantageous aspects. By outsourcing the task of account receivable management one can focus on the core functions of business and other prolific activities. The entrepreneurs can free up the working capital, the maximum portion of the capital remains tied up in the inventory in case of many business houses. It’s undoubtedly the fastest and secure way if quick financing as most of the factoring houses doesn’t require tax statement or business plan. It’s really a great resource for businesses who are currently encountering credit crunch.
The small business can operate the business buoyantly if the customers pay invoices timely but most of the firms don’t receive the payment immediately after delivering the service or products. Thus to sustain in the highly competitive market they require steady cash flow. In such occasion invoice factoring benefits the business particularly who don’t get paid within first 1 to 3 months. Factoring companies generally don’t buy 100 percent of the client’s receivables, thus there is no standard maximum or minimum sales volume that the small business must wield to obtain cash for invoices. Each of the invoice purchase is considered as a separate transaction. The transaction is typically structured as a buy and sells transaction.
The Bottom Line
Factoring is a great way that allows you to turn your receivables into hard cash. However, depending on the variables that actually factor the service charge may vary.