How To Finance Your Business By Factoring Receivables
Posted at by ifydcat on category UncategorizedBusinesses can exchange their accounts receivables for some money at a fee with another person called the factor. This whole process is called factoring. Initially this process was never considered a good source of money for any business but just for those, which were struggling financially. But these days it is one of the acceptable sources of raising money for many businesses. For any business seeking to raise money, it can do so by way of accounts receivable factoring.
In a company balance sheet, accounts receivables are also classified as finance assets and for that reason they can be used to get money for various uses within the business. All one needs to do is to get the other two parties to the transactions, the parties to a factoring process are the factor, the debtors and the seller. What the seller needs to do is to transfer its debts to the factor that will give him cash and do the collection himself.
This process does not consider a firms credit worthiness making it a good source of raising money for a business especially for a business, which may not be credit worthy to a bank, since all that a company requires is its accounts receivables. The other benefit with this process of raising money is that a business does not need to use a security just the accounts receivables.
Factoring is an immediate method of raising money, it takes a very short time to raise the money, no long vetting procedure required to get the money. As a result of this, accounts receivable factoring helps a firm to improve its cash flow process by providing a continuous source of money through its accounts receivables.
It also helps expands a business since one will get money to do that. For example if one needs more capital for the business expansion this will be achieved through factoring especially in situations where one is unable to get financing from the bank. The other advantage also is that the business can still use its other assets as collateral if there is need to raise more money from the bank.
It also removes the responsibility of collecting the receivables from the business to the factor, which in turn saves the business the administrative costs of collecting, and the time needed to do the collection. Also the risk that the debtors could default on the payments is transferred to the factor. The factor is normally more experienced in collecting debt.
Factoring does not tie a company down, as there are no long-term contracts done, there are no long term, resources involved. The business gets its money and is free to concentrate on its other obligations without worrying of the implication resulting from the source of money unlike a bank loan.
In summary, a company seeking to quickly raise money for its expansion, especially an upcoming business, can achieve this through accounts receivable factoring. Companies can also use factoring to meet their other short term obligations, which will improve their credit rating and in turn enable them to qualify for bank loans for more business growth.