Advantages of factoring

2. Factoring

Factoring is the sale of accounts receivable. By selling invoices, the seller gets cash sooner than if he collects the money by himself. The factor company that purchases receivables (invoices) takes title to the invoices and collects them when they are due. That company also assumes responsibility for all of the costs, as well as the hard work that comes with customer debt collection.

The factoring company makes its money by charging its customer a percentage of the value of the invoices it has factored. This is usually done on a monthly basis.

Most factoring is called "non - recourse," meaning that the factor company purchases all rights in the invoices and the seller has no responsibilities for collection. The factor's estimated cost and time in making collections is considered into the discounted purchase price of the receivables. In some states, however, "recourse" factoring is also permitted. In recourse factoring, the seller of the invoice are secondarily responsible for any invoices not collected. The factor company undertakes debt collection, but the seller of the invoice remains finally responsible to repay any portion of the cash price that went uncollected.

Invoice factoring can be seen as an alternative to an overdraft for a business.

Advantages of factoring

1. Quick cash:

By selling invoice, the seller can receive cash quickly. Therefore his cash flow problem and liquidity problem can be reduced.

2. No debt:

Factoring is a sale of assets (invoices), not a loan.

Disadvantages of factoring

1. Cost:

Traditional loans will typically be less expensive than the costs of factoring.

2. Possible harm to customer relations:

Collection actions taken by the factor company may endanger the business relationship with one of your customers. A factor company has little interest in preserving your future relationship with the debtor.