JAJA Georgelyn Duncan
Factoring is a financial service that purchases a company’s open invoices and provide payment within 24 hours. The financial service keeps a percentage of the payment and collects the invoice from the customer. An advance rate can vary from 80-95% depending on credit criteria of the company. Factoring allows the company to receive quick payments in order to pay their employees, handle orders, and expand the business. There are many companies that utilize factoring financial services. From transportation, health care, government, and so much more. When looking for a company that provides factoring services, it’s essential to choose one that is reputable, experienced, and flexible in funding options. When determining how much to factor, the company should factor in how much quick cash flow is needed to run the business. Some companies factor millions while others factor thousands. Additionally, when the factoring company cannot collect the invoice and the company is responsible for the payment, it is called recourse. Alternatively, non-recourse is when the factoring company is liable for the customer-nonpayment.
What Is A Factoring Company? [Video file]. (2019, May 28). Retrieved from https://www.rtsfinancial.com/guides/what-factoring
July 2 at 8:36 PM
Great point about checking the status and flexibility and reputation of the factoring company. Especially in today’s economic world with many startups that can’t get the funding they need and fall victim to a factoring company that is not legitimate or operating under common business practices.
I think of government contracts, similar to my post. If the company cannot provide services, the factoring company can still keep asking for monies. Granted the government contract process is very elaborate, it also has many gaps that could be taken advantage of by a factoring company. If my brother and I weren’t successful, and basically just left without worrying about the contract, the factoring company could keep getting the money until it was found out that services/goods weren’t provided. Then the factoring company could pull the same stunt and dissolve and become non-existent.
Sounds like an “American Greed” episode, but I am sure there are not so legitimate factoring companies out there.
July 3 at 2:51 PM
Nice post, thanks. You mention the advance rate can vary from 80-95% depending on credit criteria of the company. % of what? What is the difference for? Why? You mention credit criteria of the company. Which company, the company securing factoring services or the companies that represent the receivables?
There are several ways factoring can be contracted and Im looking for two those ways? What are they?
Jaja Georgelyn Duncan
July 3 at 7:44 PM
Hello Dr. Bookout,
Thanks for your reply. The 80-95% is the cash advance the factoring company will provide the company using factoring services. The cash advance rate will depend on three factors. The industry the company receiving the cash is in, the credit history of those customers who owe the balance and the factory company the company is choosing to work with.
Truax – Post 1
Jamie-Lyn Truax posted Jul 4, 2019 9:51 PM
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Factoring is a process for businesses to receive payment on invoices within a week instead of a possible 30, 60, or 90 days. When a business sends an invoice to a customer directly there is a time period before debt collection begins or the more aggressive means to collect on a bill. Some businesses pay as late as possible because they do not have the cash on demand to pay their bills. This delayed payment schedule creates a snowball effect that inevitably places everyone doing business together behind on their payments.
While everyone should be able to pay their bills on time sometimes its not possible. But if a business wants to maintain a more substantial level of liquidity then factoring would be a solution. Factoring is when a third party pays a large percentage of invoice amounts, retaining a small percentage for processing, directly to the business submitting. This allows the business to have cash on hand within days rather than months. Cash received this much faster allows for the business submitting the invoice to have an equalized cash flow in and cash flow out. The business can pay their obligations in a timely manner and to allow them to reinvest into their company. It also takes the burden of collecting of the bill, should the customer default, off the business and is assumed by the factoring company.
Fri at 12:47 PM
I think its extremely beneficial to have a company that can provide that type of services to businesses. I know in the company I work for we have a lot of open invoices that we have to remind customers to pay and sometimes it doesn’t get paid for 90+ days meaning my Boss loses money that he could have used for other projects and sometimes it becomes an issue of no cash flow to cover expenses for other jobs the company completes. I think a factor situation would be beneficial for smaller companies but would the amount of the fee outweigh the benefit, it would be interesting to know the calculations that factoring companies do to determine how much fee is charged vs how much is provided for the business to cover their open receivable invoices.
yesterday at 12:16 PM
Thanks, good information. I’m looking for the name of two types of factoring that nobody has mentioned. Can you find it?