David Estrakh, Express Trade Capital
More Cash Flow. For most clients, the main advantage of factoring accounts receivables is that it speeds up and simplifies the process of getting payment from their customers. Once goods are shipped to the customer, factors can usually advance their clients most of the invoice total (typically up to 80-85%). The remaining funds are sent to the factoring client when their customer pays the invoice.
Accounts Receivable (A/R) Collections. Once funding is provided for the order, the factor assumes responsibility for collections on all factored invoices (i.e. Accounts Receivable or A/R), thus leaving the factoring client and their staff free to operate and grow their business. Clients no longer have to follow up on late payments or worry about whether they forgot to collect payment on an invoice. The labor intensive and burdensome task of collections is essentially outsourced to the factor whose expertise and economies of scale allow for a better, more efficient collection process.
Funding Flexibility. Factors usually have fewer credit requirements than banks, which means access to more cash than clients would have with a traditional bank loan. Since factors are usually private entities that don’t have the stringent credit and regulatory requirements imposed on banks, they can make riskier, quicker, and more entrepreneurial lending decisions. This means less bureaucracy, greater speed, and substantially more lending flexibility.
Increases Revenue Ceiling. Factoring removes limitations on sales. Factoring clients no longer have to turn down high-volume orders due to inhibited cash flow because there is technically no limit on borrowing against receivables; the more receivables a client generates the more assets they have to obtain additional funding. Since businesses are capped by their access to capital, if a company does not have sufficient capital to produce goods, they cannot fulfill orders. Factoring helps bridge this gap.
Credit Protection. In non-recourse factoring, the factor assumes the risk of default by the customers. When credit protection is provided, the factor absorbs the risk that a customer (i.e. the invoice debtor) will fail to pay due to bankruptcy or insolvency.
Bookkeeping / Management. Management of accounts receivable is an often overlooked aspect of factoring. Keeping track of payments, past due invoices, and customer disputes while maintaining a record of all the transactions is best left to professionals. Factors have every incentive to track payments because that’s how they get paid. Factoring clients therefore receive the added benefit of outsourcing a time consuming and hassling component of their business for a fraction of what it would cost to hire employees to manage and keep track of A/R. Factors are also better situated to handle collection and management duties because of economies of scale – by handling accounts for many clients, factors have more leverage over customers because factors have more resources than any one of their clients could individually. Factors are also more experienced and knowledgeable in collections.
The above is a segment from our upcoming white paper, Factoring Basics, keep an eye out for the full piece coming soon!
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