How a Factoring Company Helps Your Business

2007-03-08 10:33:40

( Business )



Whether you operate a company store outlet or any other business, you normally deal on both cash and credit basis to maximize your sales.

However, you may also find that it takes a month or even more to collect from customers who bought your products on credit. Meanwhile, you also need to pay your own obligations to your suppliers as well as sustain your daily business expenses.

There are several ways to get the much-needed cash. One way is to borrow money from the bank using your company's assets, particularly the corporate receivables, as collateral.

You need to apply for the loan at the bank or financial institution which will then subject you and your company to a credit investigation process. Based on its credit findings, the bank also has the right to impose your credit limit, and in some cases, may even select which receivables it wants you to assign. You will still be responsible for collecting the outstanding receivables and for paying the bank for the loan plus interest and fees.

Receivables financing through the bank can be very tedious and expensive. If you have an adverse or insufficient credit history, the bank may even deny your application or grant you only a low credit limit. You still run the risk that you might not be able to collect the receivables on time and consequentially be unable to repay the bank loan on time.

Compared to bank loans, factoring may be a more viable alternative method of receivables financing. You sell your receivables at a discounted amount to the factoring company, also known as a factor. Once you sell the receivables, the factoring company will take full responsibility to collect them from your customers. You notify your customers about the arrangement, so that they will pay the factor directly. The factor makes a profit based on the difference between the amount of purchase and the balance collected from your customer.

In factoring, you don't really need to undergo the same tedious credit checking as in the bank. The factor is more interested in the quality of your receivables, and that there is no fraudulent activity involved. If the receivable is from a reputable customer, the factor is more than willing to purchase it. Furthermore, once the factoring company buys your receivable, they just pay you the net proceeds and you are totally free of the receivable.

Factoring is on a "without recourse" basis, so you are not liable for the factor's failure to collect from your customer.

There are numerous factoring companies that you can contact online, so be sure to shop around for the best offers that you can get.


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