The receivable accounts of any business can be turned into working capital by invoice factoring. In this way, a business will no longer have to worry as much about budget shortages and lack of supplies because the factoring company can give them immediate cash in exchange for invoices. This can be done by selling the business’ invoices to the factoring company at a discounted rate.
In cases when a business cannot wait for a long time to be paid fully by its customers and there is already shortage of supplies, selling your receivables might not be a bad idea. The business owners will not have to worry about where he can borrow money to purchase another set of supplies because there is a factoring company who can give cash right away.
These financing companies will give a discounted amount of money according to the total amount of invoices that has been sold to them. Therefore, factoring invoices is very helpful to businesses to keep them running even in times of difficulties.
If a business is in need of capital to purchase new inventory, then business management can definitely enter into an agreement like this as long as they have invoices to sell to the factoring company. Basically, a Factor manages essential tasks, such as posting invoices, entering payments, depositing checks, and making computer reports. So, after a business has given its invoice to the company, all the related transactions will be handled by them.
The Factor will be the one responsible to collect all the remaining balances of the customers (in most cases). They will also get the interest if there are customers who did not pay on the said date of payment; hence the total amount of interest is part of the payment for the services given by the factoring company. The other part is the discounted rate at which they purchase the invoices from your company.
This is definitely an advantage for a business because they will no longer have to think of ways about how they can collect the remaining balances of their customers. Contacting and reminding customers of their payments may no longer be necessary in this type of transaction.
With the use of this kind of business strategy, a business could focus more on the flow of its supplies and how they can maintain a great amount of customers because the business management will not have to focus extensively on collections and how to budget around the long delays in payment.
The business will achieve an increased cash flow when there is factoring company that they can rely on. If this increase of cash can be maintained, the business will gain more customers. More customers mean more invoices and more cash. This type of financing can really help a business grow.