It seems you can never have enough money, and factoring is just one more way to meet that goal. The basic premise behind the business idea of factoring is that an owner sells his accounts receivable to get a quick influx of cash. The buyer gets the accounts receivable at less than their actual value. The pay off comes when the accounts are paid in full.
Factoring can be good for the business owner. The sell gives the owner some immediate working capital that would have trickled in otherwise. It also takes the hassle of collecting outstanding accounts out of the hands of the owner. The down side to factoring is that the owner will get less money for the accounts than they show on paper.
Most owners who look to factoring are trying to find a way to smooth out the cash flow and free up time. It basically comes down to a need for having the money now instead of later. The money is guaranteed at the sell of the accounts, and the business owner doesn't have to spend time and resources trying to collect on accounts. Factoring also relieves the owner of concerns about bad debts. Collection is strictly in the hands of the buyer.
The buyer side of the factoring benefits because the accounts are purchased as much as 25% below their face value. This is a nice profit on a short term investment. It is also likely that a company interested in factoring has streamlined the collection process - making the process much more cost effective.
Factoring is not for every company, nor every investor. The best route for factoring is to find a company that specializes in this investment process and develop a relationship with it. It would also be wise to consult with an accountant to see if the process of factoring could be a money saving tool for your business.
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Factoring is the purchase of valid Commercial Accounts Receivable (AR) for cash. The following questions and answers will provide you with an understanding of invoice factoring, what it is, how it works, and how your company can begin this funding process to enhance your working capital and cash flow.
