Receivable Factoring: Role and Features of Factoring

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At times we come across business start-ups that had humble beginnings, but their growth has been steady. They’ve already succeeded in making their mark in their respective fields or industries. Ask them the reason behind their success.

Most of them would say it was their hard work, commitment and steady flow of cash that enabled them to grow. Despite having high revenue, most of the companies do not receive immediate cash for what it sells.

Having enough funds to support ongoing expenses is essential for any business to grow and succeed. If you are looking for a steady flow of cash accounts receivable factoring would be the perfect solution.

The Role of Receivable Factoring

Receivable factoring is a financial transaction where a business organization sells its receivable invoices to factoring companies. Through factoring, credit is converted into cash immediately. The factoring company transfers money based on the unpaid client invoices they’ve received from the business organization.

The factoring agency provides a value between 80% and 90% of the total invoice amount.  The payments are collected directly from the clients by the factoring company. They pay the remaining amount to the business after deducting a certain percentage as their factoring charges.

Three parties are involved in the process of factoring:

1. The Seller: The Company that sells the accounts receivable.
2. The Receivable: The cash the seller is yet to receive for the goods and services provided to the clients/customers
3. The Factor/Third Party: The organization that buys the accounts receivable and pays the cash to the seller.

Factoring Components

Given below are the components involved in factoring:

• Advance Amount: The percentage of cash the factor pays to the seller on the total amount in the invoice.
• Reserve: The amount that is held in reserve till the client/debtor makes the payment for the invoice
• Fee for Factoring: The amount reduced from the reserve as the charges for factoring on receiving the total amount from the client.

Features of Accounts Receivable Factoring

The following are some of the features of factoring.

Covering Credit by Providing Cash Advances

The factoring company provides advance cash to the business organization for the unpaid client invoices. The factor takes the risk of covering the credit.

Maintains A Proper Ledger and Reports Online

All the details regarding the financial transactions that happen between the factoring agency, the business organization, and the clients are properly entered in a ledger and reported and stored online.

Collection of Payments

Once the factoring agency has bought the receivable from the organization, they do the follow-up with the clients and collects the payments from them directly.

Credit Analysis

The factoring agency conducts credit analysis on the clients of the business organization. This gives them a clear idea regarding each client’s creditworthiness.

Every business organization needs to have access to enough funds when they have a requirement. This includes covering costs for operating and making investments that are necessary for the growth of the company.

A reliable factoring agency will ensure that funds are flowing in as steadily. Your burdens are made much lighter and you are sure to be successful in your respective field of business.

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