In its classic form, Factoring is a financial transaction in which a company sells the amount of its invoice against its customers on a given date (that is to say, the balances on bills yet due) to a third party (called the factor), which pays that amount by deducting a commission. More factoring companies exist in the major financial centers like Los Angeles. Conventional financial institutions like Banks, having understood that this type of cash flow funding could take their market share away because of the clear benefits it presents. Therefore, factoring services are not only recognized by the larger institutions, but also a powerful means to solve cash flow issues. For example, Housewares can be use this type of financing to increase their business many fold.
Factoring of Housewares activities provide the following benefits:
Through work situation and billing 2 types of billing may be funded by factoring, work situations and interim bills.
1. Using your 30-60 day term invoices as collateral and selling them to a factoring company to provide immediate cash flow;
2. Using this method of financing also does not add any additional debt to your company and allows your company to take on short term advances on work while at the same time knowing that these advances will automatically be paid by your customers invoice payments.
Documents requested by the factoring company
Validation document that invoices are true and payment terms are not altered;
Confirmation of invoice that there are no offsets and payment will be made to a secure lock box provided by factor.
Deadline for submission to the factoring company
The invoices are given to the factor for funding after having been checked and approved by the Housewares or in the first 30 days the invoice is generated.
The advantages and disadvantages of factoring
Companies are increasingly turning to factoring as it allows them to get money quickly instead of waiting times admitted customer payments which are generally between 30 and 60 days after the issuance of the invoice. After sending an invoice to a factoring company, the company can receive the balance of the receivables less the commission of the factor and a security deposit within 48 hours.
Another advantage of factoring is that it is adapted to the current operating business financing. Indeed, factoring is often less expensive to a business than traditional loan from a bank that often limit the amount of sales a company can achieve due to tight restrictions whereas a invoice factoring company can increase limits to allow a much great volume of sales.
The real choice is not made by a lawyer or an accountant, it must be made by a business person that understands the opportunity costs of growing sales or to just grow at an organic rate solely based on internal cash flow growth.