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A number of organizations, especially the smaller ones find it difficult to maintain a steady cash flow most of the time. There have been cases where even those businesses that had a high demand in markets had to be closed down due to issues of finances and huge debts.
Maybe your company is facing a similar situation or maybe you are a start-up business considering different ways by which you can maintain a steady cash flow. Heard about receivable factoring? If not continue reading to understand more.
What Exactly Is Accounts Receivable Factoring?
Factoring also referred to as accounts receivable factoring is a process where an organization or business sells its accounts receivable to a business factoring company. The factoring company collects the payments on the invoice from the clients of the organization. Factoring accounts receivable helps a business organization in the following ways:
- Cash flow is built-up
- Don’t have to wait until their clients decide to pay
- Receives cash quickly and in time
- Take care of obligations that are outstanding by paying them off
- The capital that remains tied up in the receivable account gets freed
- The risk involved get transferred to the factoring agency
Cost Of Factoring Receivables
The cost of factoring accounts receivable depends largely on the following factors
Fee For Factoring Invoices
The charges for factoring invoices are determined by a factoring agency after considering the following things.
- Your business industry
- The number of clients and customers
- The quality of your clients and customers
- Financial statement of your business
On average, the fee charged by factoring companies could be anywhere between 0.5%-5% of the total invoice charges every month. The higher the number of invoices the lesser the fee charged for factoring.
Certain factoring agencies add additional charges besides your fee which they mention in the agreement. Make sure you talk to your factoring agency regarding such costs before you enter an agreement with them.
The Length Of Service Required From The Factoring Company
The charges for factoring also depends on how long you have requested the services from the factoring agency. The longer the time the higher the charges for accounts receivable factoring would be.
When To Depend On Factoring Receivables?
You can consider taking the services of a factoring company in the following situations
When Your Company Requires Additional Finances
Depending on the needs of your company and its current financial state certain factoring agencies provide additional finances on top of what the company has already received. However, not all factoring agencies can assure this form of arrangement.
When Loans From Banks Are Denied
The performance of the business is taken into consideration while applying for a bank loan. Banks usually deny loans when the organization’s bank balances remain negative, their banking history has been poor and when their credit score is low.
This wouldn’t be a problem for factoring agencies because they are more concerned with the reputation and creditworthiness of the client.
If your business is looking for a steady flow of cash to meet the immediate requirements of finance receivable factoring is the solution. Factoring takes care of the financial requirements which ensure the growth and success of your company.