Factoring Receivables For Better Cash Flow

12/08/2011 15:19

In the financial world, factoring receivables refers to a process where a business sells its debts to a third party. The third party pays the business for the value of the invoices, minus a percentage. They then pursue the debtor for the funds. This transaction is made possible because debts are listed as an asset on a company's balance sheet.
Factoring provides the business with better cash flow and takes away a lot of the risks associated with providing credit. It also means that the business can operate with a small credit control department or remove it all together.
There 156-515.65 are three ways that the business is paid. A percentage of the invoice is paid to the seller on submission. The rest of the invoice value is reserved until the debtor makes payment. Once the payment has been received, a fee is taken and the remainder is paid to the seller.
There is often a service charge attached and there can also be an interest charge based on the time that the debtor takes to make the payment. Some companies will charge their client interest based on the time it takes a debtor to pay. This interest is either passed onto the debtor or is paid by the company that generated the invoice.
The fees paid to the factor are small in comparison to the amount of money that they handle but they still receive a good income. Since their function is only administrative, the factor company has fewer overheads than the business which generated the invoices, so can afford to wait for the money to be paid. They are set up for one function only, so are specialized in cash collecting. They will have links to establish law firms who will help them pursue the debt and they will have a well practiced system which will help them collect the cash quicker than a business can.
Effective Cash Flow Is Important When Factoring Receivables
When factoring receivables, effective cash flow has a critical impact on whether the receivables decrease or increase. The best way increase your cash flow is by decreasing your outstanding receivables. Conversely, as your receivables increase, your cash flow typically declines.
There are many ways to go about lowering your outstanding A/R. Liquidating them into cash is the 156-915.65 obviously the most effective way to be profitable. However, you can also accomplish this by writing them off the books as a bad debt or uncollectable account.
Statistics and benchmarks show that being able to convert your accounts into cash should range in the thirty five to forty five day range. What this means is that from the time you bill or invoice your client, you should expect to see payment with that time frame. The lower your accounts receivable days are the better your books look in terms of financial strength. It also shows that you have an ability to create and expect timely payments from your buyers or consumers of your product.
That is unless you require payment the day of or prior to delivery of the good or service. In this case your concern is more related to in stock inventory 156-110 and merchandise. You can also help speed up your cash flow by offering online bill pay and inventory management system. Here your customers can simply log in to your website and view and pay their invoice electronically.
As an investor it is always important to factor in the overall receivables and debts that you are considering either purchasing, financing or investing in. This portion of a companies balance sheet is a good indicator of the financial health of their organization. Managing this part of a business can always be outsourced to an external vendor or business partner in the event it looks too negative or is seen as an obstacle.