See Also:
Another Way To Look At Factoring
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
History of Factoring
How Factoring Can Make or Save Money
What is Factoring Receivables
The What, When, and Where About Factoring
Why Factoring is Not for my Company
I normally talk about real life situations when I talk about cash flow problems facing a company. This week, I am making an exception because factoring is the most misunderstood accounts receivable financing product offered to business owners.
Most business owners are led to believe factoring is only used by companies that are going broke. The truth of the matter is broke companies can not get any type of financing for the simple reason, they are broke. Factoring is mostly used by companies that do not have the invested capital from the owners to take advantage of business opportunities they have before them.
Following are questions I am frequently asked about the factoring process. What I have found is, once a business owner understands the factoring process they determine that factoring will solve their cash flow problems and needs.
1. What is factoring?
Factoring is a working capital funding product for a company’s accounts receivable. Furthermore, factoring will take the place of a traditional bank line of credit. Factoring must provide the company with a greater access to cash to fund growth. Factoring is a transaction whereby a financing company such as Summit Financial Resources purchases a business’s qualified accounts receivables.
2. How does factoring work?
Normally, within 24 hours of submitting a valid business’s receivables for financing, funds will be transferred to the company’s checking account. The amount of the initial funding is normally 80% to 90% of the face value of each invoice purchased. The balance of the factored invoice will be funded to the company’s checking account after full payment of the amount owed by the company’s customer, less the factoring fee.
3. Why do Business Owners factor?
Account Receivable financing allows a business greater access to cash flow which is capital. The reason the company has greater access to cash is the amount financed isn’t limited by the company’s financial condition but rather it is based on the financial strength of the company and of their customer base.
4. What are some benefits of factoring?
The following includes four important benefits from financing accounts receivable using factoring:
• Greater access to capital to fund growth compared to traditional sources.
• Reliability of the funding process, with straightforward guidelines for funding.
• Owners can expand their business without giving up ownership or control.
• Gain access to a professional credit management and collection process at no additional cost.
Having seen hundreds of companies utilizing factoring to grow their businesses, I know factoring is a great financing product. Remember, factoring must make or save you money to be the right funding solution.
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