Factoring of Receivables

If you are a seller of products or services or both, then you are no stranger to delayed payments. The business world allows pretty often a month or two to the clients for paying the invoices, which often turn out to be a challenging task for businesses looking forward to cover all business-related expenses within this period. The practice is infamous for bringing down the cash reserves, but the paradoxical truth is – There’s hope in despair.

What is factoring?

Welcome to Factoring - the selling of accounts receivable. It generates the cash, thus relieving a business from the pain of waiting for a long period for getting paid by the customers. But factoring is not a business loan; it is an advance payment on an outstanding invoice.

There are factoring companies who set the credit-worthiness of the customers of a business. Contrary to banking policies taking credit decisions based on a company's collateral(s), cash flow and an overall financial history, factoring not being a loan, relieves the company from taking the liabilities to their balance sheets. But above all, factoring is a fast process that bears fruits within a few days or hours as opposed to the length of time required by the banks.

How factoring of receivables benefits a business

Factoring of receivables or accounts receivable factoring has a number of benefits. Firstly, it speeds up the transactions (24 hours max); next, it involves fewer intricacies; provides the required capital so that a business can survive and mostly, it establishes the fact that a business has reliable customers.

In fiscal terms, factoring of receivables pay up to 85% of an invoice in the first installment and then the remaining 15% after the factoring company receives the pending payments from your customers. And all that comes for a small service fee – typically 1.5% to 6% of the total amount pending. Newer businesses benefit the most out of factoring of receivables; however, since it remains depended on a company’s sales performances, it bars a fixed line of credit.

Advantages of factoring

• Immediate receipt of cash.

• No need for showing the balance sheet; its customers' credit-worthiness that matters.

• Doesn’t bar delivering the goods and/or services that are promised.

• A company's financial history doesn’t come into the picture.

• The rates are variable and depend on specific circumstances.

• Factoring cost/fees are tax-deductible. This is because factoring stands as a business expense.