Factoring definition
It is a type of financing in which a company sells its account invoices to another company at a discount. Companies opt for this form of financing whenever they experience cash flow problems due to the failure of clients to pay on time for the goods delivered or services rendered. It also improves the company’s working capital through invoice financing.
Every time the seller sends an invoice to his customer, the factoring company pays the seller at least 70 percent of the invoice value within 24 hours. The remaining amount will be paid once the customer has paid the invoice in full. Here the customer does not make the payment to the seller but the factoring company.
Circumstances under which a company should use invoice factoring as a form of financing:
When there is need to grow your business Don't use plagiarised sources.Get your custom essay just from $11/page
Invoice factoring is one of the forms of financing that grows hand in hand with your business without the involvement of complex credit committees or time limits. As long as you extend equitable sums of credit to creditworthy companies, a factoring company can finance your business against eligible invoices within the shortest time possible.
The need for timely and accurate reports
Factoring companies are known to provide well-detailed reports to their customers. Most businesses lack a qualified in house bookkeeper who can compile the transactions involved in an accurate and timely manner. Business owners need accurate reports to evaluate the progress of their business and what needs to be done to get things right.
The need for peace of mind
Business owners can sit and relax, knowing that there is cash in the account to cater for salaries and other expenses.
A business owner has a peace of mind when it comes to evaluating the areas of his or her business that need to be strengthened to improve production and generate more sales since there is an assurance of funds to support this.
Invoice factoring is becoming more popular amongst business owners looking to expand their businesses with limited capital. Other sources of financing involve complex procedures that discourage business in their pursuant.
The need for credit protection
Factoring companies can guarantee their customers credit protection against non-payment resulting from customers’ failure to make payments promptly or when a customer is unable to pay for the goods delivered or services rendered. Most businesses are unable to seek credit protection because of the high premiums it comes with. Factoring companies can provide credit protection to their clients at reasonable rates.