What is Factoring of Receivables and How Can You Benefit From It?

If your business is cash-strapped and you’ve heard that factoring could be a great way to get out of a financial rut, then chances are, you’ve thought about factoring of receivables. Factoring is not rocket science. It’s actually a simple, cut-and-dried arrangement between you and a third party known as the Factor or factoring company.



Whatever business you engage in, whatever industry you belong to, you’ll always need a steady flow of cash to offset any changing cash needs that occur in the course of doing business.




For example, some of your equipment or tools may suddenly need to be repaired or upgraded. You may need to hire additional temporary staff whom you need to pay per day of service rendered. You may be offered bargain prices on materials that are important to your operations, but the catch is, you need to pay in cash for all your purchases.




All of those activities require spending, which wouldn’t pose a problem if your business had a continuous stream of cash payments. However, most likely what you have are accounts receivable or payments that are yet to be collected. Unfortunately, the waiting period can tie up your finances.




You have options to manage the situation:




  • You can defer making any purchase, no matter how necessary, until you have enough funds. The downside of this is you could jeopardize the efficiency and quality of your operations.




  • You can take out a loan and have to contend with interest rates, as well as expose yourself to the risk of being unable to meet your obligations on time because your account receivables don’t clear up as scheduled.




  • You can apply for factoring.




Factoring and Your Business




To understand what is factoring of receivables all about, review these steps:




  1. Present yourself to the Factor as a business that needs immediate access to cash and has a number of accounts receivables.




  1. Offer to sell your invoices to the Factor. Invoices are proof that products or services have been delivered to creditworthy customers, but no payments have been made yet, and as such, need to be collected.




  1. The Factor calculates the aggregate amount of the invoices. From the total, the Factor buys the invoices at a discounted price. The payment is given to you immediately, in cash.




  1. The Factor then takes care of collecting from the customers, and administers the sales ledgers.




When you consider that 26% of invoices that are 3 months old, 70% of invoices that are 6 months old, and 90% of invoices that are 12 months old become uncollectable, then it makes sense to inquire about your options with a factoring company such as Neebo Capital as soon as possible.




Neebo Capital will be able to inform you more about the details relevant to what is factoring of receivables, such as how much you can get for your invoices, in order to maintain the solidity of your business operations and the stability of your cash flow.

What is Factoring of Receivables?

Factoring of Receivables
Factoring as a part of business was done in England even before 1400, and it started in America with the Pilgrims too, in the early 1600s. It seems to be nearly related to the early merchants of this country. Factoring has changed over several centures.

Receivables financing is sometimes called factor, and it’s a method that businesses use to convert their sales that were done on credit to an immediate cash flow. This is the preferred financial tool in getting liquid working capital for businesses of all types and sizes. The credit line that can be received is based on the customer’s financial strength, that is the buyer, and not the client, that is the receivables seller.

Factoring is a kind of financial transaction, and a business will actually sell its invoices to another party, and this party is referred to as a factor, for a discount.

The three separate parties involved are the party who sells the receivable, the customer, and the factor. The receivable is basically a kind of financial asset that’s connected with the liability of the debtor to pay the money back to the seller, and it’s often for work that’s done or goods that are sold. The seller will then sell at least one of his invoices, that is, the receivables, at a discount to another party, which is called the factor, and the purpose is generally to get cash.

The receivables sale basically transfers the ownership of the invoices to the factor, and that means that the factor has all the rights that are connected with the receivables. Basically, the factor will get the right to get the payments made by the debtors for the invoice amounts and, in a certain kind of factoring known as nonrecourse factoring, he will also have to bear the loss if the debit never pays the invoice because of a financial instability to pay it. The account debtor might be notified of the invoice’s sale, and the factor will bill the debtor and carry out the collections. There is also non-notification factor, where the seller will collect the accounts that are sold to the third party factor, as the factor’s agent, and that also happens.

The origins of factoring lie in trade financing, especially international trade. Factoring might have originated with ancient culture in Mesopotamia, and it is by no means something new. There were rules of this process that were written into Hammurabi’s Code.

Factoring as a part of business was done in England even before 1400, and it started in America with the Pilgrims too, in the early 1600s. It seems to be nearly related to the early merchants of this country. Factoring has changed over several centures. There have been changes in how companies are organized, technology, the advent of the telephone, and the advent of the computer.

Factoring is generally a method to obtain cash. Sometimes, the cash balance of a company will be insufficient to meet the current needs and obligations that they have, like contracts or new orders. Sometimes, there are industries where factoring has been a historic part of how they run their business, like in apparel or textiles. The firm can keep a smaller cash balance that’s ongoing with factoring. By cutting down on the cash balance size, a lot more money is available as an investment for the growth of the firm.