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What is Factoring and How Can it Help Your Business?


Posted: 18th November 2014 09:53

Your company has its share of successes and struggles. A common obstacle for some businesses is the risk of their on-hand cash flow drying up. This could be disastrous, especially if  business has experienced a lull or slowed due to many circumstances. For many companies, customers who are slow to pay their past or current balances, compound the issue. One of the ways to help your business increase cash flow and to collect on these outstanding payments is to hire another company who specialize in accounts receivable and invoicing. In the financial universe, this type of arrangement is known as factoring.
 
History of Factoring
Factoring is far from a recent phenomenon; in fact, it's been around for centuries. The Code of Hammurabi, a piece of legislation inscribed on a human-size stone by its namesake Babylonian king, is perhaps the earliest example of factoring—and it was created back in the 18th century BC. The Western world began using factoring as a business tool in the 1400s; with England and the United States paving the way.
 
Overview of Services
With factoring, your business sells your accounts receivables to a company, which is called a factor. Factors are typically companies that specialize in the commercial finance sector, and they maintain diversified portfolios, helping clients in industries that include manufacturing, IT, food service, oil and gas, professional staffing, and transportation. An example of a well-established factoring company is New Century Financial, which has purchased accounts receivables worth over $1 billion to date.
 
Once the factor receives the invoices, the company gives you the majority of the money due on each invoice, thereby granting you an advance. This happens soon after the factor checks the creditworthiness of the customers. Typically, the advance can run anywhere from 70 percent to 95 percent. There's something else that happens when you sell your invoices: the factor now has the legal right to collect the balance that your customers owe you. Upon payment of the bill, the factor gives you the rest of the money, which is the remaining balance minus the factoring fees (typically around 2 to 6 percent).
 
Benefits
Without factoring, businesses have to rely solely on the customer paying on time to generate cash flow. For most companies, their worst case scenario is having the customer refuse to pay entirely, which requires collections. Factors, however, accelerate the payment process, since you would receive the amount owed you within 24 to 48 hours of selling your accounts receivable. This is particularly crucial if you are in a pressing financial situation, and you need cash as soon as possible, or you're in an industry where invoices are typically paid very slowly, like long haul trucking for example. In that case, the truck owner would consider factoring freight bills to get payment up front. Many companies have experience dealing with specific industries, which you should use to your advantage. Additionally, factoring can become the preferred alternative to traditional bank financing; factoring is a lot faster than relying on your local bank. Factors can keep you informed of your financial health by running your accounting operations and generating financial reports.
 
Helpful Tips
Do not hesitate to contact a factor when your business is strapped for cash, or when you're looking to streamline your invoicing and payment systems. Some of the healthiest companies, including those in the Fortune 500, are some of the most active users of factoring. However, make sure that you turn to factoring when you have huge tickets, rather than small ones; it is more economical to do the former, since factors attach a fee to each invoice, regardless of amount.
 
This article was contributed on behalf of New Century Financial, your number one choice when looking for assistance with factoring. Check out their website at www.newcenturyfinancial.com



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