Improve Business Productivity with Factoring

Factoring is a financing method in which a business owner sells its account receivables  (i.e. invoice) to a third party or "factor company" at a discounted price. This is done so that the business can obtain cash quickly than waiting for 30 to 60 days in order to receive customer payment. Factoring is often called “accounts receivable financing.”

Under this factoring arrangement, a factor company agrees to provide financing and additional services to the selling business in return for interest and fees on the money which they advanced against the seller's accounts receivables. Businesses in want of cash can thus secure about 80 percent of their accounts receivable’s face value and the leftover 20 percent of the value is held in reserve until the accounts are collected.

Steps Involved In Factoring

• Firstly, a careful evaluation of customers is done and a credit limit is set on them.
  
• Next, the factoring firm enters into the agreement with the selling company.
• Selling company through its sales invoice gives a hint to its customers that the amount is being factored with the factor company and now, on the due date, the customers have to make the payment directly to the factor.
  
• After keeping a required margin, factor makes the advance payment to the selling company.
• On the due date when the customers make the payment, the factoring firms deduct its fees or additional charges from it and look at the amount already advanced to the selling company.
  
• Finally, after estimating the entire amount, they give the balance amount to the selling company.

Advantages of Factoring

There are several reasons why factoring is a valuable financial tool for many businesses:-

• The key benefit of factoring is to guarantees a quick boost to the company’s cash flow.
  
• Many factors provide cash on accounts receivable within 24 hours.
• The financing does not show up on company’s balance sheet as debt.
  
• Factoring is based on the quality of firm’s customers’ credit, not its own credit or business history .Also, they provide a line of credit based on sales.
• Unlike a conventional loan, factoring has no limit to the amount of financing.
  
• They align well with start-up businesses that require instant cash flow.

PMF Bancorp, headquartered in Los Angeles, is one of the best commercial lenders that can provide innovative AR financing as well as a collection of other financial services that can help take any company’s business to the next level of productivity and profitability.