03 October 2017

Guide Book To Invoice Factoring

At times factoring is mistaken to be a sort of discounting term used in financial transactions. But it is far from that. Factoring is when as a business, you sell your accounts receivables or invoices to a third party at a discount. The title of a factor is given to the concerned third party. And this concept is known by different names mainly invoice factoring, factoring charges or just factoring. The receivable is essentially a financial asset associated with the debtor's liability to pay money owed to the seller. Factoring is generally done to raise capital. It is a three party transaction that involves the seller of the accounts that is the person that is trying to raise the capital, the third party to whom it is being sold or the factor and the customer of the seller. Also factoring doesn't create any sort of liability on the balance sheets and contrary to popular opinion it is not really an expensive way of cash lubrication.
Textile industry is one such industry where invoice factoring is the method used for cash management. There is a need for generation of cash as there are longer credit cycles in this sector.
Dynamics involved in factoring
What next once the invoices are sold to the factor. The factor acquires all rights over the invoices be it for goods sold or for services rendered. Hence it's an indication that the factor might have to bear the losses in case if the customer doesn't pay up then.
Some common reasons for invoice factoring
1. To whip up instant cash flow.
2. To fully utilize or increase business capacity or infrastructure.
3. To meet future business needs
How many different types of factoring are there?
Factoring is of two kinds. Each of the two types is explained below:
1. Advance Factoring: The factor pays up to 80% of the accounts receivables in advance to the seller and the remaining on receiving the total amount from the customer of the seller.
2. Maturity Factoring: There is no advance payment. The factor pays the seller the full amount on a date that is closer to the actual payment date by the customer of the seller.
It is advisable to be partial with advance factoring as it has the advantage of time. Most of the times people come into cash.
Who pays for the gap between actual receivables and their selling price?
Most businesses take this very cautiously. The gap goes on minimizing between realizing money from pending receivables and raising new invoices. This result in a major benefit and the seller of the accounts can pursue other cash generating activities in the meanwhile. Mostly seller gets nearly close to 80 percent to 90 percent of the accounts.
Invoice factoring due to hike in the cash flow in business is highly preferred these days. In spite of this there are a lot of misconceptions floating around it. However to actually leverage this cash benefit and time benefit, thus involve the financial advisor. Look for the advisor online.