Factoring Companies

Factoring Companies in the Business World Today

Factoring companies are a growing business. More and more business are opting to sell its invoices, also known as accounts receivable, to a factoring company.

What exactly is a factoring company and what does it do?

In basic terms, a factoring company is a financial business which quickly and readily finances the invoices of companies or businesses needing to have immediate access to money for items or services that the company may have sold or provided to its customers. As an example, a furniture manufacturer may have sold a lot of furniture to some warehouses and distributors. The total outstanding invoices may total $2 million for the merchandise sold, but the accounts may not be paid for 30 or 60 days.

In the meantime, the furniture factory has expenses to meet and cannot wait on the payment of $2 million from the customers — it needs money today. The furniture company then sells the accounts receivables to the factoring company and gets the set pay rate from the factoring company almost immediately.

At that point, the customers are notified to remit payment to the factoring company unless a previous agreement has been made for the original owner of the invoice to continuing managing the account then remit the payments to the factoring company as they are received.

Is factoring used often? Some companies are required to maintain large inventories relevant to their business, and thus have a large number of receivables. Although factoring gives the company fast and easy access to cash, it can be very expensive and causes the company to lose control over its receivables accounts. So overall, yes, factoring is used much more frequently today than it was 20 or 30 years ago. Several financial analysts consider factoring to be the financial business of the future so factoring companies continue to be a growing business.

How Difficult is Factoring?

Before the computer age and technological advances, factoring was not an easy task. Because accounts were kept by hand, most factoring companies would have had to keep hard copies of all the files themselves and even had a staff member on site at the company with which they were doing business. With today’s advances, files can be transferred by computer and all payments and adjustments are entered into the correct computer program which maintains the account.

Does All Factoring Work the Same?

Well that answer would be yes and no. When working with a factoring company, the factoring company does take over the accounts receivable. Which type of agreement your company works out with them defines how the factoring process works. Two options are maturity factoring and discount factoring.

Maturity factoring enables the factoring company to take over the entire accounts receivables process from issuing credit to collecting the accounts. The factoring company then sends the originating company the amount of receivables based on the average due date. For this service, the factoring company receives a fee that can vary up to two-percent of the amount of receivables.

Discount factoring allows the originating company to transmit the invoices to the factoring company and in turn, receive immediate payment for them based on their average due date. The amount received by the originating company will be adjusted for returns, claims, and early payment discounts. In this instance, the factoring companies usually charge about three percent interest on the daily average balances.

Is There a Difference in using Factoring Companies and Accounts Receivable Financing?

Yes there is a difference between using a factoring company and accounts receivable financing. Accounts receivable financing requires a business to build a relationship with a financial institution in order to set up a revolving line of credit. In this case, the business is still the sole owner of the invoices, or the accounts receivable.

Based on credit history, the amount of the accounts receivable, and the type of business, the line of credit can vary. On average, however, the line of credit usually ranges from 70 percent to 90 percent of the accounts receivable value, so the business can draw funds from that specified amount of funding. In most situations, interest is charged only on the funds that are withdrawn from the revolving line of credit account.

Accounts receivable financing may be less expensive than working with a factoring company, but it is not for everyone. Accounts receivable financing uses the accounts receivable as collateral for the line of credit, there is usually a minimum amount of monthly sales required, which may not work with a smaller company.

What are the Benefits of Factoring?

When in need of money there are some benefits for the company that chooses to work with a factoring company. This type of financial agreement is usually flexible, as you don’t have to sell all of your invoices and can be selective about which ones are sold and the amounts of those sold. Since the interest rates and fees are determined by the invoice, it is easy to calculate the cost of financing.

Another advantage to working with a factoring company is that if the invoice they own becomes past due, it is their responsibility to try to collect it. Often the agreement says the original company is not responsible for uncollected debts so the factoring company is the one that takes the hit in this situation.

What are the Negative Aspects of Working with a Factoring Company?

As with everything, the factoring company option has its bad to go along with the good. A bad thing about working with a factoring company is that the original invoice owner is, of course, losing money in the long run. When the invoice is sold to the factoring company it is sold at a discount, which is usually a considerable amount less than the face value of the invoice.

What is the Outlook for Factoring Companies?

Business has grown for factoring companies in recent years. Many financial analysts and business experts credit the struggling economy for boosting factoring company business. The business world can be unpredictable and small businesses are going to always need money. Whether the funds are for regular expenses, such as utilities, or for a sudden unexpected expense, such as a broken forklift needing repair, odds are there will always be some sort of need for fast funds.Factoring Companies

As the demand for the services of factoring companies has grown in recent years, the number of factoring companies vying for business has literally skyrocketed. By a quick online search or a look in the phone directory will show multiple listings for factoring companies. Some factoring companies are also branching out and are willing to offer more services to help the client. One example is a factoring company which also offers accounts receivable financing and other financial options.

Some factoring companies only deal with specific industries, such as active oilfields. In such instances the factoring company may work with welding companies, drilling companies, trucking companies, and any other companies providing equipment or services related directly to operating an active oilfield.

Some factoring companies are offering “instant cash,” which means they can deposit funds by wire transfer within an hour or two, so factoring companies are a way to get the needed cash fast. So when in need of cash for your business, you may want to contact a factoring company or two to see what they can offer your business. Sometimes a factoring company can be the leading factor in helping a business stay afloat.

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