A factoring company buys the open invoices from business and pay them to cash in return. The payment of the invoices is usually made within 24 hours. Then, the factoring company is responsible for collecting the unpaid amounts against those invoices from the clients. Factoring is also called accounts receivable financing.
If you think why the companies use the services provided by the factor, then you must know that the businesses get immediate money against their unpaid invoices, rather than waiting for a long period of 30 days, 60 days, and sometimes even 90 days.
The amount the company factors depends on business needs. Some companies factor all the invoices, while some factor the invoices of only those customers who have a habit of paying late. With factoring, companies increase their cash flow and can pay employees, handle customer orders, buy raw materials, etc.
How Does it work?
To explain the different steps of how factoring works, here you go:
· Firstly, you provide services to your customer.
· The, you send the bill to a factoring company.
· The factoring company pays you to cash in advance against your invoice, typically within 24 hours.
· Then, the factoring company collects payment from your client.
· The factoring company pays you the remaining invoice amount. At this time, the account receivable financing companies deduct their fee as well.
Advantages of factoring:
If you want to know some more benefits of hiring the services of a factoring company, then here are some of the best advantages:
· The factoring company takes all your headache of managing back-office and taking your collections.
· If you are not sure about the creditworthiness of your customers, the factoring company is ready to bear the risk. They also do a quick credit check of the client and his business history.
· The factoring company customises and manages capital, as and when you need it.
· In this type of financing option, there is no debt incurred like traditional loans.
· Also, the amount of funding available increases as the company grows.
· Many people vouch for the fact that the services and mode of operation of a factoring company are much better than the traditional loans.
Can companies use factoring?
Any companies of any sizes, from single managed businesses to biggest multinational companies, use factoring to increase their cash flow. Factoring is used by several industries such as trucking, transportation, textiles, oilfield services, health care, manufacturing, government, contracting, staffing and more. Some companies need immediate cash paid by the factoring company to pay salaries and buy inventory; some companies use the