Do not confuse factoring with other forms of financing since it does not work the same as asking for a loan or a line of credit, nor should you think that it consists in delivering our accounts to a collection agency. The factoring is a method that companies can use to sell their accounts receivable to a factoring company at a discount from face value.
Generally the companies use the factoring to dispose of money and thus use it in their daily operations, with suppliers, accounts payable, etc., these are bought by the factoring companies, who charge a percentage for their services. The way in which the factoring works is the following:
A company sells 50,000 pesos to a client, the payment time is usually for 30 days, but the company needs to replenish its inventory for 100,000 pesos, also needs to buy 20,000 pesos from an order for a second client, the company at this time does not have the capital to settle and cover these expenses, so it decides to go to a factoring company in which they pay the 50,000 pesos of the first customer with a nominee discount, in this way the company. It gets the money before and the factoring company acquires the value of the account receivable.
As you can see it is a process that can bail out.
- Access to cash is almost immediate
- If you have a constant flow of sales, factoring is a great way to improve cash flow
- It is a form of financing that does not depend on the credit rating of your business
- There is no debtor-creditor relationship
- You can have money before to carry out basic activities of your company
- It gives more liquidity
- Since it is your accounts receivable that you place under guarantee, you do not need to be indebted
- Protect your company’s credit rating
It can be an expensive form of financing for the discount rate they handle
The control in collection processes is lost and this may affect the relationship with the client, depending on how the collection is carried out by the factoring company
Remember to find out if this form of financing is right for your company, I recommend it for small companies with liquidity problems and you need to have money for your operations, even if the business is highly leveraged can be very useful factoring as it improves cash flow and no additional debt is acquired.