Factoring refers to a financial transaction in which a business sells its invoices i.e. receivable accounts to the factor i.e. third party at some discount in exchange of the immediate money which are needed for financing the continued business. It omits a month or a two which the customers take while paying the invoices and you get the working capital that you can effectively use to run your business. When you are in a business, several things are needed to be taken into account when you are getting approved for financial factoring services. These services are basically based on the average invoice size which could either be international or domestic. Also it is to note that factoring is a firm-based operation. It is very simple and is used in most of the businesses. An advantage in using this service is that you get a predictable cash flow; also it eliminates the uncertainty of being paid.
The two types of applications applied by financial factoring services companies are discount method and prime plus method. In prime plus method lower rates are produced. Although many companies use both these methods in order to determine the cost charged to a client. While looking for these services another point you should keep in mind is to keep a proper check since many companies offering these services have hidden fees which is not revealed initially. In prime plus method, there are two types of fees; first part of the fee called factoring fee is applied to every invoice and is only one-time while the other part is the interest charge on the financial advance provided by factoring services firm. The discount method is applied to invoices by factoring services firm’s is primarily based on percentage number of days.
The basic procedure involved in financial factoring services is as follows. While you deliver services or goods to your client, you issue an invoice. Now you need to sell your invoice to a company which offers factoring services which provides you with the first instalment. This amount is almost 70% to 90% of the gross value of invoice. It takes almost 24 hours to receive the advance amount. After one or two months, your customer pays you the invoice and the factoring company issues you the second instalment which comprises of the remaining funds. The procedure of obtaining financial factoring services is much faster, easier and simpler as compared to entire procedure involved in applying conventional business loan.
The main requirement for applying financial factoring services is that your company should have reputable customers in your business since invoices are factoring company’s deposit. With these services the financing line of your company grows with your sales and eventually your company progresses well. It is an easy procedure and can be set up within few days. This is ideal for established companies or start-ups. Also the factoring rates are higher than the traditional bank financing but the products of both are invariably different.
