Use Invoice Factoring to Succeed

Factoring is an accounts receivable financing strategy for businesses to sell accounts receivable at a discount to get cash needed for business growth and development. By factoring the value of the accounts receivable, the business is able to increase the speed of cash flow.

The business can use a factoring company to obtain cash equal to the value of the accounts receivable minus a factor's fee. This process can also be referred to as invoice factoring.

When factoring an invoice, three parties are affected by the process, the seller who owns the invoice, the debtor who owes the balance on the invoice and the factor or factoring company who will buy the invoice.

There are several types of factoring.

Full service factoring involves notifying the debtors who owe the balance. The factoring company controls the credit as they collect the outstanding debts.

Invoice finance allows the seller to keep the credit control function so the factoring company is undisclosed to the debtor.

Recourse factoring is the most common type of factoring. In this case the seller continues to be at risk as the seller must buy back the invoice if the debtor does not pay within a specified time frame. This is the lowest cost option for the seller because of the risk involved.

Non recourse factoring puts the risk of non-payment completely on the factor who purchases the invoice. If the debtor fails to pay, the factor cannot attempt to receive payment from the seller. As a result the factor will often turn away customers with only average quality of credit. The cost of this type factoring is higher since all the risk is on the factor.

New company factoring.

Factoring is ideal for a new company to get financing since often when new, banks are more resistant to making loans to a company. By selling accounts to a factor (or finance company) the company can gain immediate cash based on what its customers owe. In this case the company would send the bills to the factoring company for payment rather than to the customers themselves, eliminating the wait for the billing cycle to complete.

Caution regarding factoring.

Factoring is an expensive source of funds and is only recommended when a company is growing faster than their current funds can handle. It should be used more as a last resort than as a first solution. Factoring can be a huge benefit during rapid growth or difficulty so focus can be on solutions and processes rather than on concerns for keeping bills and payroll paid in a timely manner.

To offset the cost of factoring, have customers pay higher percentage points to receive flexible terms. Give a large cash discount to customers or clients who make cash payments at the time of purchase. This way covering the cost of factoring can be turned into a benefit for both the customer and the supplying company.

Janie Jenkins is the "Easy To Do" instruction expert. Discover how easy it is to do what seemed like your most complicated ambition.More About Factoring