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How Does Business Factoring Work

Aug 15, 2008
Business factoring is also known as invoice discounting, debt factoring, receivables factoring, among others albeit with a few small alterations. This is a very helpful financial tool for fast growing companies that have many credit clients in the pipeline, but not enough ready cash to service them effectively and meet business expenses effectively.

If you have many credit clients and are supplying products to them on a 30 or 60 days credit basis, then once you have dispatched your invoice, you would then have to wait for 30 or 60 agonizing days, until your payment becomes due. This effectively locks your own money and you might find that although your sales figures look impressive, your cash position might still be pathetic.

A business factoring company can then step in and save the day. These companies will 'buy' your credit invoices and in return will transfer the invoice amount into your account within a couple of working days. They will however, retain their factoring fee that could be anywhere in between 1.5% to 5% of the invoice amount based on a few conditions. This fee will be decided once the business factoring company checks the credit rating of your client, checks the number of days that you have provided as credit to your client and also checks the entire amount of business that you can provide to the factoring company.

The factoring company might also hold on to another 5% to 10% of the invoice amount, until the client pays the invoice amount on the due date. This money might get locked up, in case the client does not pay the invoice amount due to any disagreement. The factoring company might offer you the option of recourse or non-recourse factoring, which basically means that they could also take over the risk of collecting the payments from your clients at an additional charge. This means that even if your client fails to pay the factoring company on or after the due date, you will still not be at risk.

Business factoring can thus improve your cash flow dramatically and this will help you in meeting your business expenses, such as paying your suppliers and employees, and can even help in funding your business expansion plans. You can also buy your products in bulk by taking advantage of quantity or cash discounts. Business factoring ensures that you do not have to wait for the due date to approach to collect your payments, but instead can receive the money as soon as you submit the invoices to your factoring company.

If the factoring company has taken over your receivables, then you will need to inform your clients about your decision and you can then redirect your collection staff and your efforts towards increasing your sales figures. Once you talk to a business factoring company of your intention to tie-up with them, it normally takes around a week to verify the various facts and start the factoring process.

Thus, business factoring can improve your cash flow and also take on your collection hassles, thus becoming an extension of your business. By tying up with the right factoring company, you can both grow together, as your business increases along with the value of your invoices presented to them. Being highly flexible and practical, this method of financing can help you to maintain or increase your growth level, while enabling you to meet your expenses comfortably.
About the Author
Freight Factoring Company Phoenix Capital group is a one stop transportation services company. Freight Shipments and related Factor Growth has increased in the USA as shown. To learn more or to start your Freight Factoring visit: http://www.phoenixcapitalgroup.com
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