Factoring Account Receivable
Overview:
Invoice Factoring is the new way of financing method that most companies use in order to obtain a new source of funds to support their companies’ operations or projects.
The main concept of Invoice Factoring is that the company have many amounts of account receivable on hand and this will be payback by its customers.
Yet, waiting for customers to pay back the account receivable is quite a waste of time and money through interest. The payment is also not in the big amount at one time that the company could use to fund its big operation or project.
Therefore, the concept of Invoice Factoring has come and the company could sell all of its account receivables and getting a large number of funds at one time.
This is really important for cash flow management as well as operational control. It is the new way of cash flow management.
How does it work?
The process of Invoice Factoring is that the company could offer to or receiving an offer from the factoring companies to sell all or part of the invoices. These invoices refer to accounts receivable.
In most of the cash, the company receives the part amount of account receivable that it sells. For example, 90% of receivables in advance.
This amount is normally quite big and it could use these fund to support large projects or investments.
The factoring company will charge the administration fee and sometimes interest from the company. Sometimes, it has been said that Invoice Factoring has potential hidden fees.
However, sometimes it is difficult to meet the requirement of a factoring company if your company has a small amount of receivable outstanding as well as receivable in every month. They require a certain amount of AR.
Another problem with Invoice Factoring is that our customers will be up sad with our company because the debt is collected by the new agency.
In most of the case, those agencies could make the relationship between customers and company as the result of a misunderstanding.
Factoring Account Receivable
Invoice factoring is the very poplar financing service now as it could help the company to cash in advance to deal with its daily operation cost.
In normal case of invoice factoring, the company could get the upfront cash base on the percentage that it’s agreed with the factoring companies.
Some of the factoring company could offer up to 90% per cent of its client turnovers. Let say if your company turn over have $800,000, you will get $720,000.
That means you are not requiring obtaining the loan or overdraft from the bank or seeking to new investors. This money might help you a lot to deal with your suppliers.
The above is not only the benefit, but most of the factoring company might help to manage your sale ledgers so that you are not to worry about how to control it.
Invoice factoring now is another kind of financial service which is very poplars. The requirement for invoice factoring might be not much as the bank.
If you just have enough annual turnover, and stable stales, you are eligible to get more cash for your business grows.
Factoring Account Receivable, Financial Accounting
Factoring accounts receivable is very popular now regardless of the size of the business.
Before you are considering factoring your accounts receivable, you have to know what the benefits that you will obtain from are. The following are those benefits:
Upfront Payments:
First and it might be the most important things that may turn the business owner to consider factoring its account receivable is receiving the early payment or sometimes they call upfront payments.
The business receives early payment for most of its receivables, in the form of finance from the factor. It can use this money to pay its suppliers.
This might be the most benefit that you want to hear about as it could help you to solve many problems with your suppliers.
Optimum Inventory Levels:
Factoring of accounts receivable could help the business to optimize inventory levels can be maintained, because the business will have enough cash to pay for the inventories it needs.
When the company has enough money, it could secure its inventor’s level, and suppliers will not have the reason to delay.
Factoring of accounts receivable exactly could help the business to growth through sales rather than by injecting fresh external capital. The company will not require asking the bank or investors for obtaining the money.
In normal cases, the business gets finance linked to its volume of sales if they get receivable factoring. In contrast, overdraft limits tend to be determined by historical statements of financial position.
Other Benefits:
The managers of the business do not have to spend their time on the problems of slow-paying accounts receivable.
Factoring organizations are also likely to employ staff who are experienced and skilled at collecting payments from customers, and chasing overdue payments.
The business does not incur the costs of running its own sales ledger department and can use the expertise of debtor management that the factor has.
Factoring Account Receivable
Management sometime to try to minimize administrative cost, improve quality of the collection, and resolve cash flow problems by using two effective ways, one is factoring it accounts receivable and another is invoicing discounting.
These two technologies are very fruitful especially for the small companies that just start up their business. In this article, we will detail discuss the major aspect of factoring account receivables.
So who provides this great service?
Well, it is the Factoring companies and they are defined as ‘a doer or collectors of business for another’, yet factoring companies specializes in trade debts, and manages the debts owed to a client (a business customer) on the client’s behalf.
The companies have many specialists that could manage and collect the debt or trade receivable for other companies more effectively as just because of their experience, specialization and, skill.
Before we decide whether we should sales our accounts receivable to factoring companies or not, we should know that the main aspects of factoring account receivables. The following is its main aspect:
Administration: the companies will help its client on invoicing, sales accounting, and debt collection service. If the companies decide to factor it account receivable, they need not to concern about these jobs anymore.
However, both companies will need to have a contract and detail on how to do these jobs.
Credit protection: companies will be responsible for all the loss of credit if the customers are not going to pay. In this aspect, the company could make sure that it will not face such a risk.
Receive cash in advance: Base on the contract the factoring companies will pay its client the cash deposit say, 70% of total account receivable.
There will be many other aspects might not be included here.
Conclusion: We hope that this post will help you understand the concept of factoring account receivables, and how it works with factoring companies.
