Factoring Receivable: Ready money for your business

The possibility that you are going to deal with the shortage of cash during your business career is quite probable. It can happen in early days of the start-up, but can also appear later when a need for fresh cash occurs to expand the business, take it to a higher level or simply to cover any kind of investments or expenses on daily/weekly bases. It is wise to search for various ways to ameliorate the existent cash flow of your business and to thoughtfully explore available options.

However, when all other alternatives are used up, perhaps you should think about factoring.

It can get handy to pay suppliers, meet payrolls, add sales and in other emergencies when the wheels of your business are rolling, but the cash is tight. First, get familiar with this method of literally selling invoices, i.e. accounts receivables in exchange for immediate cash. In practice, factoring receivable is financial activity of selling invoices (accounts receivables) with a purpose of obtaining prompt cash. Mostly factoring is simple and quick way of solving a cash flow problem, but it of course always appears with certain expenses. Naturally, factoring company, i.e. the factor is charging a considerable fee to cover its service. Looking from this aspect, factoring proves to be a better short- than long-term decision, but still handy to put your hands on the cash fast and without complications, usually related to efforts get approved a bank loan.

To see yourself as worthy client, a factor will ask to see your documents, firstly receivables, i.e. invoices.

In practice factors actually fully manage your sales ledgers and in order to check how reliable your buyers are, you will have to show them your books. Factors are much more interested in your buyer's financial discipline than yours, but to justify their trust you will have to reveal current financial statement, several reports, invoices and other papers related to your business, all with the purpose to state your real financial position.

Because the factor is going to purchase your accounts receivables, it has to be sure your buyers pay them in a timely fashion. And in reality factors aren't willing to take over just any invoice, but they always look for invoices that are very probable to be paid by the buyer, thus not the ones that are regularly overdue.

The pattern is quite simple. When the factor and you agree upon which invoices it will buy, you receive an advance from the factor. It can vary depending on several matters, but let’s say you agreed on eighty percent of the total amount of account receivables. When the factor receives the payment of your buyer, it will recoup you the twenty percent left, reduced for the fee, of course. Fee charged by factors usually vary, but reckons on the amount of your account receivables, i.e. invoices, creditworthiness of your buyers and to the amount of the time that your collection cycle requires (interests charges). Sometimes, factor will charge additionally administrative expenses like postage, long-distanced phone calls or computer time. However, you can take leave of somewhere from three to seven percent of the total that your factor collects from your customers, sometimes even more. After all, factors are business companies working to comply the same mission as is yours: make money. And perhaps you just don't have enough time to affect timely payment of account receivables; factor surely has. In the world of business, time is money.

No matter how much in hurry you are to get immediate cash for the needs of your business, always consider the pro's and con's of factoring receivable. It can be indeed a good solution, mostly when your really need prompt money and - most important - by taking advantages of the money you know will be coming in. After you apply to a factor and his reviews are over, the money can be on your account in a very short time, even within one day of issuing the invoice. More and more factors provide Internet access to your account and electronic transfer of your invoices to the factor can substitute a lot of paperwork while allows constant monitoring of individual customers and your ledgers in general.