As common as the term is, knowledge usage is as rare. Let us see below what it is and how it works.
What is Accounts Receivable Factoring
Most business in the UK have accounts receivables functions. Accounts Receivables is simply the process of generating an invoice to send to a customer, who, in turn, must pay it within an established timeframe, called credit terms or payment terms.
Accounts receivable factoring is a method where one company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer to make a profit upon collection of monies owed. Factoring transfers ownership of such accounts to another party that then works vigorously to collect the debt.
What sort of businesses use accounts receivable factoring?
Any business that sells goods or services on credit to customers can consider accounts receivable factoring. Accounts receivable factoring is a is a simple arrangement where a business sells its accounts receivable or invoices to a third party called a factor) at a discount in exchange for immediate money with which to finance continued business.
How does accounts receivable factoring differ from traditional bank finance?
Accounts receivable factoring differs from a bank loan in main ways.
The emphases are on the value of the account receivables or invoice the firm’s credit worthiness.
Accounts receivable factoring is not a loan – it is the purchase of the accounts receivables or invoice.
A traditional bank loan or overdraft involves two parties whereas accounts receivables factoring involves three.
Can I choose when I use accounts receivables factoring?
Some businesses choose to factor all their accounts receivables or invoices and some businesses choose to factor only a few. In other words, you can customise your accounts receivables factoring facility to meet the needs of the business and its owners. Large firms also use the technique of accounts receivables factoring at the end of reporting periods to ‘dress’ their balance sheet by showing cash instead of accounts receivable or outstanding invoices. There are a number of varieties of accounts receivables factoring arrangements offered to invoice sellers depending upon their specific requirements.
What are the Adavntages of Accounts Receivable Factoring?
- Accounts receivables factoring companies offer various combinations of money and supportive services when advancing funds.
- Accounts receivables factoring companies often provide their clients with key value added services.
- Accounts receivables factoring companies can prove information on the creditworthiness of their prospective customers domestic and international customers.
- Accounts receivables factoring companies maintain the history of payments by customers (i.e., accounts receivable ledger).
- Accounts receivables factoring companies provide daily management reports on collections.
- Accounts receivables factoring companies can make the actual collection calls.
- Accounts receivables factoring companies can provide an outsourced credit function that both extends the small firms effective addressable marketplace.
- Accounts receivables factoring companies can protect businesses from the impact of a bankruptcy or financial difficulty of a major customer.
- Accounts receivables factoring companies eliminate the need and cost for permanent skilled staff found within large firms.
- Accounts receivables factoring companies services insure the entrepreneurs and owners against a major source of a liquidity crises and their equity.