Factoring is the selling of accounts receivables to an outside company, also known as a factor. These debts are sold at a percentage of their value, usually between 65 and 90 percent. The factor then collects the rest of the debt, paying you the remainder minus a small fee. Factoring is a time-tested way of getting money for your business quickly. With proper business strategy, it’s a great technique to keep your business profitable.
One easy way to make money with accounts receivables factoring is by reinvesting the returns into other aspects of your business. Suppose that you need to purchase a big ticket item but don’t have the capital immediately available. A factor company provides the quick burst of cash you need to make that item yours. Maybe you want to take advantage of time-sensitive supplier discounts? This is also a great time to consider factoring as an option.
There are two types of factoring: recourse and non-recourse. In a recourse transaction, your business assumes the risk of non-payment. If the customer fails to pay the debt within an allotted time frame, you must repay the advance and the fee. A non-recourse transaction is exactly the opposite; the factor takes the risk. Obviously, a factor company will usually be more cautious with a non-recourse transaction.
In a way, non-recourse factoring is a type of credit, especially with new customers. You sell your receivables to the company and get an advance. You supply the factor company with the customer’s information, and they recommend the amount of credit you should offer the customer. The factor takes the risk of the customer being unable or unwilling to pay the debt. That’s why the factor examines the customer’s credit history very carefully.
Non-recourse factoring takes some of the risk off your business, but some companies may not take your customers if they have poor credit ratings. Make sure that you know the financial standing of your customers well. As long as repayment is secured, this method of keeping a steady stream of capital flowing through your business is effective.
Keep in mind that if you use the same company for an extended period, they’ll treat you as a valued customer. You’ll be rewarded in some way, often with a lowered fee. It seems like a small amount when you compare 2 percent and 1.5 percent, but the actual dollar amount tells a different story. As the percentages get lower, accounts receivables factoring becomes like a business loan.
When new accounts come in, factor them to replace the old ones. As long as you keep a steady stream of customers, you’ll have a supply of quick cash for reinvestment. If one factor company isn’t working well for you, shop around until you find a better rate and excellent customer service. Factor companies are just as competitive as any other businesses, and they’ll match each other to win you as a client.
Factoring works best when the values of invoices are high. It is often a necessary endeavor when your business is suddenly hit with an influx of orders and you don’t have the resources to complete them. As long as you have sound business principles and know your customers, factoring makes it easier to run a profitable business.
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