Factoring is when a business sells its invoices or receivables to a third-party financial company who collects payments from the business’s customers. Companies choose this route so they can receive cash quickly on their receivables rather than waiting the standard 30 to 60 days. This method also makes it easy for companies to meet obligations such as paying employees and processing customer orders in a timely manner (Factoring, 2019.sec.1). There are two types of factoring. The first is known as recourse factoring which means which means that the financial company takes the responsibility of paying for the invoice if the customer cannot. Second, non-recourse factoring allows companies to sell their invoices to the factoring company who then claims all credit risk associated with the collection of invoices (Factoring, 2019.Sec 10). When choosing a factor company, it is important to pay attention to the fee structure. Some companies charge an overall fee based on the number of invoices they receive while others have additional fees for things like money transfers and shipping (Factoring, 2019.sec.11). Therefore, making sure the factoring company is up front about the fees involved is important prior to signing a contract (Factoring, 2019.sec.11). Based on the research conducted factoring can be a benefit to businesses because it allows for faster cash build up, prompting the growth of the business to move at a faster rate. A great example of using factoring for the benefit of a business is the trucking industry. I personally have experience with this as I assisted in the start up of a trucking company. Through factoring, truckers can access cash quicker which ultimately allows for faster transportation. Whether it’s for truck repairs or agreements on jobs this helps to organize and manage money better and build the business.
Reference:
What Is A Factoring Company? (2019). Retrieved from https://www.rtsinc.com/guides/what-factoring
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