One of the oldest forms of business financing, factoring is the cash-management tool of choice for many companies. Factoring is very common in certain industries, such as the clothing, automotive, trucking, construction and health care industries, where long receivables are part of the business cycle.
Companies that use factoring like it because they get money quickly rather than waiting the usual 30 or 60 days for payment. Often companies are in a cash-flow squeeze due to slow paying customer so they sell their invoices or accounts receivables. After sending an invoice to a factoring firm, a business can receive up to 90% of its money within 24 to 48 hours.
Financing costs on factoring can easily exceed 20% of the value of the receivables. And let's face it, banks usually focus on mature companies that have solid asset bases. Companies use it to meet cash-flow needs as a stop-gap measure. Others prefer factoring to banks, which often require more paperwork, or other outside investors, who may want a piece of the business.
Factors can be useful for new businesses that don’t have the benefit of robust cash flows or extensive credit histories. Unlike banks, which are obviously concerned with the financial condition and credit-worthiness of a company, factors are concerned only with the credit histories of the company’s customers and their ability to pay.
But not every company that uses factoring does so to improve cash flow. Often they factor because it allows them to avoid having to employ an in-house accounts receivable department. Some factors are employed by companies because factors can often do a better job of evaluating the credit risk associated with the company’s customers. Other companies use factors to offset risk during good times.
Companies that use factoring like it because they get money quickly rather than waiting the usual 30 or 60 days for payment. Often companies are in a cash-flow squeeze due to slow paying customer so they sell their invoices or accounts receivables. After sending an invoice to a factoring firm, a business can receive up to 90% of its money within 24 to 48 hours.
Financing costs on factoring can easily exceed 20% of the value of the receivables. And let's face it, banks usually focus on mature companies that have solid asset bases. Companies use it to meet cash-flow needs as a stop-gap measure. Others prefer factoring to banks, which often require more paperwork, or other outside investors, who may want a piece of the business.
Factors can be useful for new businesses that don’t have the benefit of robust cash flows or extensive credit histories. Unlike banks, which are obviously concerned with the financial condition and credit-worthiness of a company, factors are concerned only with the credit histories of the company’s customers and their ability to pay.
But not every company that uses factoring does so to improve cash flow. Often they factor because it allows them to avoid having to employ an in-house accounts receivable department. Some factors are employed by companies because factors can often do a better job of evaluating the credit risk associated with the company’s customers. Other companies use factors to offset risk during good times.
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Very simple example of Factoring
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