What is Factoring?

by Factoring Companies on June 23, 2010

Factoring is a form of commercial finance, when a company takes the decision of discounting its receivables from accounts at times when the factor bears the account’s credit risk.

Factoring is useful when a business company sells the invoices of it’s customers to a financial company. Invoice finance is sometimes referred to Factoring which is a method of improving the cash flow of a company. It has been one among the most efficient forms of today’s finance.

The History of Factoring

The Factoring tradition has been traced since the period of the Mesopotamian era by King Hammurabi. Several documents prove the existence of Factoring before the American Revolution for shipment of various raw materials to Europe.

During those days, Factoring agreements were based on “all or nothing”, whereas in recent years, a business is allowed to Factor any desired number of invoices with single Invoice Factoring.

When a small business and wants to acquire some additional finance to improve business, then Factoring could be the best technique to speed up the companies flow of cash. Many people get confused with Factoring of receivable accounts. This financing generally refers to an agreement of loan between two business parties.

Factoring usually involves financial transaction among three parties. The worthiness of a customer’s credit is the primary feature that matters with the Factoring agreement.

Single Invoice Factoring, most commonly known as Spot Factoring refers to an advanced practice of picking a spot, or selecting Factors of desired invoices, thus permitting to retain maximum amount when one spends minimum cash with the Factoring company.

Benefits of Invoice Factoring

Benefit 1. Improves cash flow

Here cash flow is efficiently managed. Having access to a ready cash flow enables a business to present oneself in a competitive way which further results in the growth of business.

Benefit 2.Offers flexibility

Invoice Factoring provides better financial access which helps a company to be flexible and also able to negotiate over discounts in payments from suppliers, which results in greater savings.

Benefit 3.Saves precious time

Invoice Factoring allows one to take more time looking over productive issues rather than wasting time on chasing the payments.

Processing of Invoice Finance

With Invoice Factoring, a businesses supplies goods and services to it’s customers and a payment invoice will be made payable to finance company. They then send a copy of the invoice to the finance company which decides to pay an agreed percentage of invoice total in advance.

When the customer gets settled with the invoice, payment is made either directly to finance company or by Invoice Discounting method; a business might need the help of lender to make payment to the business account. The subtracted amount of debt balance and agreed service charges will be paid by the finance company.

Finally, the finance company then issues ledger statements of the monthly sales to the borrowing business company.

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