Factoring is a form of a loan. It’s a financial position where a firm receives funds in return of selling their accounts receivables to a third party which are referred to as the factor. The factoring process involves three parties that is; the vendor and customer of the receivables and the factor itself. The receivables are typically in the shape of financial assets that the creditor holds to ensure the responsibility of the debtor to reimburse the borrowed funds. Though they may seem similar, a factor is absolutely different from a bank loan in that a factor is a reliable source of funds even when banking establishments aren’t. The primary interest of factoring is how credible a firm is vis repaying borrowed funds while that of the bank is the suitability in terms of credit of the borrower but not of its consumers.
Most business companies fail to engage themselves in factoring usually because of shortage of data on the terms that apply to the method of factoring. They do not realize the various benefits that might arise from the act but only speculate the negatives that would arise from it.
Factoring is especially more helpful for small firms that need to add to their sales and increase their profits. They can use the borrowed funds to maybe increase their stocks and with the presence of increased inventory, business is more certain to operate more smoothly and efficiently which eventually puts the firm into a position to repay its debts as well as to enable it to grow its operations.
Nevertheless factoring isn’t limited only to the little firms. It also applies to the big and developed companies that feel that they can do far more to expand their operations. Whether for large scale or small scale operators, factoring is a wise move as it boosts the company picture of an organization. This is because of the fact that when the clients know that an organisation engages in factoring, they know that the organisation in mind is a good investor in activities that are undertaken with the purpose of augmenting profitability as well as looking into the well being of the clients and stockholders at large.
Most business administrators are uncertain about the actual cost their firms are likely to incur when factoring but it highly is dependent upon the sort of factoring used. Factoring in most examples is specified into two; the inclusion of an administration charge and including a loan interest or a mere discount charge. Further costs to be incurred might be the filing fee which is charged by some corporations though not all.
Though factoring seems to be highly captivating, a firm still wishes to take a look at its drawback. This is in that although factoring guarantees good returns, its interest rates are typically unusually high as compared to those of banking institutions. Failure of an organization to meet the agreed on demands leads to the debtor losing the invoices being held by the creditor which are sometimes of a higher price than the factor itself.
Spalding Scattergood would like to thank the pros at G Squared Funding for their guidance on every aspect of factoring for business – trucking, staff, payroll, invoice – which has been used in writing this document.