Factoring has become a major source of working capital for most small businesses. Factoring is considered an additional working capital because it helps to release money tied up in your invoices. With sufficient working capital, businesses can take advantage of new opportunities, pay off their existing debts, increase their inventories, and provide offer special terms to their customers. Invoice factoring is more attractive than bank financing since it depends on the collateral of the invoices due to the debtor. Additionally, factoring invoices allows the business to obtain quick funds required to ensure smooth running of the business. Through invoice financing, companies can eliminate that 30 to 90 days it takes customers to pay their invoices.
For a factoring firm to determine the fees charged for providing accounts receivable financing services, it will have to consider a number of factors. First, the factoring firm will consider the project dollar volume a company has. The higher the projected dollar volume the lower the charges. Other factors taken into account include customer’s average paying time, number of invoices sent to the customers, average invoice amount, number of factored customers and the credit worthiness of the business’s customers. Based on all these factors, the factor will determine amount of money the company will pay the factoring services provided.
There are two main types of accounts receivable financing, which include non-recourse factoring and freight factoring companies recourse factoring. In non-recourse invoice financing, the factoring company takes over the risks of the invoice when they choose to buy it from you. A non-recourse factor may provide you a lower purchasing price to compensate for the added risks it is taking. In recourse factoring, the factor makes your business liable for any invoices that are not paid in full. The type of invoice factoring service you choose will be determined by your current invoice payment history.
Factoring account receivable is highly advantageous for most small businesses in this faced paced world. Some of the key benefits a business can derive by financing its account receivables include ability to build business credit. This because you will be able to pay your bills early enough, and thus you will build your credit worthiness. Since most factoring firms do not require you to factor all your invoices, they can allow you to choose the invoices you want to factor. For instance, you can opt to factor invoices of only those customers that pay slowly. This will help you to further reduce the amount of factoring fees.