Have you heard the term factoring and wondered what it is? Do you wonder if factoring is for your business? How should you select a company to use for factoring? Understanding Factoring Let's start with a definition for Factoring, which you may have also heard referred to as Accounts Receivable Financing.
In broadest terms it is a way to accelerate your cash flow, and reduce issues related to non-paying or slow-paying customers.
Specifically factoring involves the act of selling accounts receivables to a third party (called a factor), at a discount.
The factor (third party) assumes all risk associated with the debt, and has the right to make collection on the debt.
Any money collected is kept by the factor (third party).
Any money that is contractually due to your company for a good or service already provided is considered an account receivable.
Should Your Business Use Factoring Actually a better question to start is can your business use factoring?If you do not have a material amount of money in accounts receivable, you are not in a position to pursue this option.
I'm sure you are thinking, "But they'll only give me pennies on the dollar.
"You are correct, it will be a fraction of what is owed to you.
However you've gone from uncertainty, to a known payment now.
You can't spend an IOU.
Plus you can use the time you would have spent trying to collect to focus on bringing in new clients.
Do you have clients past due?Problem clients? What is your track record on collecting? Do you need cash now for your business? Selecting A Factoring Service Provider There are many considerations when selecting one or more companies to providing factoring service.
While we have provided highlights below, you may wish to consult with an expert before signing a contract.
If it is not clear, consult an attorney.
The contract is binding once you sign it, and if it were to be contested, the argument that you didn't read it or didn't understand it will not work in a court of law.
In broadest terms it is a way to accelerate your cash flow, and reduce issues related to non-paying or slow-paying customers.
Specifically factoring involves the act of selling accounts receivables to a third party (called a factor), at a discount.
The factor (third party) assumes all risk associated with the debt, and has the right to make collection on the debt.
Any money collected is kept by the factor (third party).
Any money that is contractually due to your company for a good or service already provided is considered an account receivable.
Should Your Business Use Factoring Actually a better question to start is can your business use factoring?If you do not have a material amount of money in accounts receivable, you are not in a position to pursue this option.
I'm sure you are thinking, "But they'll only give me pennies on the dollar.
"You are correct, it will be a fraction of what is owed to you.
However you've gone from uncertainty, to a known payment now.
You can't spend an IOU.
Plus you can use the time you would have spent trying to collect to focus on bringing in new clients.
Do you have clients past due?Problem clients? What is your track record on collecting? Do you need cash now for your business? Selecting A Factoring Service Provider There are many considerations when selecting one or more companies to providing factoring service.
While we have provided highlights below, you may wish to consult with an expert before signing a contract.
- Ensure that the contract clearly states this is on a non-recourse basis.
This means that the risk is being assumed 100% by the company who is purchasing the accounts receivable. - Clearly the amount of money, and timing in which you will receive it is crucial.
- Is the company requiring you to use them for a certain period of time?If so, be sure to understand termination rights and any limits on pricing during that period.
- The reputation of the company.
Even though these are delinquent accounts which you probably won't consider for repeat business, how they are treated still reflects on your company.
Just do a search online about collection agency complaints, you will see the company from whom they purchased the debt is often smeared right along with them.
If it is not clear, consult an attorney.
The contract is binding once you sign it, and if it were to be contested, the argument that you didn't read it or didn't understand it will not work in a court of law.
SHARE
