We know that a sale is not a complete sale till we collect all the money. Yet realizing unpaid invoices might take up a lot of time and this lag might prove too costly for your business or company at many times. An easy way out of this is to choose factor funding options. This funding can be raised simply by sale of one of your biggest assets – invoices. This money that is due to you can be realized immediately by selling it off to the factoring companies. In other words, factor funding is a financing funding used by businesses to generate capital.
What is the implication of factor funding?
Factor refers to the third party (here the factoring company) who purchases your invoices in return for a small service fee. They help you to eliminate the sale-to-collection business cycle of waiting for the payment period. A factor purchases your invoices by paying you as much as 85-90% of the total amount. The risk then automatically passes on to the factor in case of a non-recourse factoring agreement. You get your cash now and this is what makes the whole deal sound so good to you.
Factor funding is determined upon the creditworthiness of your customers. The better the creditworthiness, the much better are your chances of getting such funding. Also your business credit rating is no issue to the factor hence your fall in payments will not affect your chances of realizing immediate cash. The factor provides you with add-on services like effective handling of all you’re invoicing and data entry. Also you get immense relief from passing over the responsibility of collecting no-pay or slow-pay clients. The best part of factor funding is that it will help you to make best use of increased production plus sales and avail better vendor discounts.
Factor Funding Regulations:
All you need to do is to set up an account with a factor to provide you cash against your outstanding invoices. Your customer then becomes liable to make payments to the factor instead of you. The factor will charge you a fee for this service and this amount is determined by factors like how much business you do the credit worthiness of your clients, the time lag for receiving payments etc.
The number and type of invoices you want to factor will depend upon you. You can first pick up the clients that are rated highest and factor them as per your need for cash. There are no minimum or maximum limits fixed in this regard, but the more the better. Also starting to factor right from day one will only improve your chances of keeping your business cycle moving in full flow.
Depending upon what type of account you have set up, non-payments from your client are dealt with. Recourse accounts require you to guarantee that you will either buy-back or exchange any unpaid invoices. You can also choose to apply funds help up in reserve account. For non-recourse accounts, the risk is taken up by the factoring company under certain conditions.