Checking Out the Financial Credit Zone

Almost every business-to-business transaction is expected to be financed on credit. But we are not speaking about a standard business loan. What we are discussing is the fact that most business-to-business type customers would expect to receive 30-day, 60-day or even 90-day terms. This means that even though goods or services have been sold, no income will be generated until the invoice comes to term. By factoring receivables the provider is able to collect these monies owed much more quickly, enabling the business to use its working capital more effectively.

Factoring receivables is the practice by which a company "sells" its account receivables to a "factor" in exchange for receiving the cash for these receivable immediately rather than having to wait for the terms cited on the invoice to expire. The factor provides the cash to the company but withholds a small percentage as a fee for expediting the receipt of cash. Thus the company receives much needed cash faster than they could otherwise expect.

Every commercial venture has operating costs such as staff salaries, raw materials, office rents or a whole host of other overheads. For a business with a limited amount of working capital, too many funds tied up in outstanding accounts receivable invoices can cause cash flow problems. By factoring receivables this cash flow situation is alleviated.

Factoring receivables can be an extremely cost-effective way of ensuring that your business maintains an adequate level of working capital, enabling it to continue its commercial ventures without a hiccup. The cost of factoring is fairly low, and will typically be between 1.5% and 3.5% of the overall value of the invoices which are to be factored. It should be noted that this cost is far lower than the interest rate that would be charged upon a business loan, and for this reason factoring receivables is a particularly attractive option. For many businesses, factoring receivables is an important and integral part of their overall accounting process.

A further benefit of factoring receivables over other forms of business finance is in the fact that it is far easier to obtain than a loan. The company that factors the invoices is not lending money; it is purchasing a saleable asset in the form of debt to the client company. Therefore, the company's creditworthiness and overall financial situation is not a deciding factor in the decision to agree to factoring receivables. Consequently, receiving a positive decision when approaching a factoring company is far more likely than when applying for other forms of funding.

We can clearly see that factoring receivables is a cost-effective, efficient way of ensuring that when a customer makes a purchase, the funds are received by the company quickly. This ensures that the business maintains adequate levels of working capital at all times, and protects a business from late or bad payers.

About the Author:

Oliver Feakins is an online marketer managing a variety of Internet-based projects in Lancaster, PA. He provides marketing support for the website Factoring Force at http://www.factoringforce.com.

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