What is Factoring?
Factoring is the only financial method in which three separate services are offered together and service delivery. In the most general sense, factoring is the transfer of time receivables arising from sales of goods and services to a factoring institution by way of assignment and the management of these receivables by the factoring institution.
Three Factoring Services
We said, “Factoring is a financial method that consists of 3 different services offered together”. Let’s take a brief look at the three different services we’ve mentioned, one by one:
1- Collection and Management of Receivables
It is the process that starts with the assignment of the receivables arising from the sales of goods and services to the factoring institution. The factoring institution that has assigned the receivables is related to the management of these receivables; undertakes the collection, keeps records of receivables, performs operations such as notice and warning for the collection of receivables. In addition, conducting market research and transferring market-related information to the customer can be undertaken by the factor as a service issue.
2- Guaranteeing Your Receivable Against the Risk of Non-Payment
In the case of insolvency of the debtors of the receivables assigned to the factor, the risk of non-payment of the receivables is assumed by the factor. Thus, the customer, who assigns his receivables to the factor, is protected against the fact that the companies to which he sells goods become unable to pay their debts.
It is the payment of a part of the time receivables assigned to the factoring institution to the customer (the assignor of the receivables) by the factor without waiting for their maturity. Generally, this payment amounts to at most 80% of the total receivables. When the receivables are due, the entire receivable is paid by the debtor to the factor, and the factor deducts its expenses from this amount and pays the balance to the customer.
Your business needs more capital, and traditional funding sources say your prospects are excellent, but you don’t yet fit their criteria; you’re either too small, too leveraged, have tax problems, or don’t have enough history. Sound familiar?
Factoring assists firms in increasing cash flow by decreasing the uncertainty related to the timely payment of approved invoices. Under this program, A Factoring Firm acquires the accounts receivable of the client through a purchase and sale process, coupled with an assignment. This program allows the client to better plan, manage and fund the growth requirements of the firm. Utilizing the Factoring Program clients are paid cash on all approved invoices within 48 hours of submitting approved invoices to the Factor (once set up), not the 30-60 days that it takes a client to pay.
Sectors where the method is most widely used
Factoring was designed to help companies improve their cash flow, and to do so without going into debt. Many industries factor and others choose too for better cash flow management.