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Accounts receivables may be a source of immediate funding for a business. Factoring is a financial transaction that involves a business selling its accounts receivable invoices to a third party or factor. These accounts receivable are usually sold at a discount, and the business is given a lump sum payment for the discounted receivables. Factoring invoices provides immediate capital to the seller of the accounts, and these accounts are sold for a cash payment. When the balances are paid on these invoices at maturity, the factoring company collects these payments and receives a fee. Any additional payment on these invoices that is above the arranged fee is sent to the original business.

RECEIVING IMMEDIATE CASH

In many businesses there is a cash flow that varies from season to season or from year to economic year. A cash flow that is dependable and steady is often a reason for a business to consider using a factoring arrangement with the accounts that are outstanding. Short falls of cash may create problems that jeopardize the business rate of return that has been invested in the company. Net income is a factor that is frequently an indicator of the strength of a business. A business may choose to use a factoring agent for its credit worthy invoices for the following reasons:

  1. to offset a negative cash flow,
  2. to assist in periods of low cash flow, and
  3. to bridge a time gap that is temporary

PROCESS OF SELLING ITS INVOICES

A company may sell its invoices to improve the firm's growth. The company may decide that extending credit to its customers is an expensive and time-consuming convenience. The customers may remain patrons of the business if the outstanding invoices are sold to a third party to collect. The factoring company chooses those invoices that are credit worthy and are likely to pay the bill in full and on time. The original business may continue to satisfy its customers by extending additional credit. The business is not hindered by the delay in full payment on these accounts that have been extended credit. The relationship with the customer is continued as the factoring company manages the full payment of the accounts outstanding.

GAINING FROM A FACTORING ARRANGEMENT

The business is said to have gained from a factoring arrangement of its accounts receivable if the rate of return on the proceeds from the production of these accounts is greater than the cost associated with factoring these receivables. Factoring may be used if this rate of return percentage is a positive one. The amount of cash that a business wants to carry on hand is another decision that the company will need to make. If the business needs a significant amount of cash on hand, then a factoring arrangement may seem more of a positive necessity for the company.

QUALIFYING FOR A FACTORING SERVICE

Qualifying for a factoring service may include several of the following features:

  1. The service must be performed before the account is factored. A proof of performance will need to be sent to the factoring company.
  2. The various invoices will need to be verified, and the credit worthiness of the customer will be determined.
  3. Due diligence of liens and pending lawsuits against the company who is applying for the funding will be completed.

A SIMPLE PROCESS

The process of factoring certain accounts receivable for a business is a simple process. The following is an outline of this funding process:

  1. The account may be set up in 3 to 5 working days.
  2. No financials from the business will be needed, and there are no upfront fees.
  3. Advances against the accounts receivable invoices may be made the same day or within 24 hours.
  4. There will be quick credit checks for the prospective customers or accounts receivables.
  5. There is no minimum invoice fee and no credit facility fee.
  6. Previous bankruptcies or poor credit is not involved in the determination for invoice factoring.

SUMMARY

There are several reasons why a company may consider using a factoring arrangement for its account receivable invoices. This type of customer convenience may become expensive for the business rate of return. Extending credit may cause certain cash flow concerns or seasons of low cash on hand.

About Author:

Andrew Cravenho is the CEO of CBAC LLC, an innovative invoice financing exchange. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.

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