What Should I Take Into Consideration Before Making A Factoring?
Have you ever felt frustrated because even when you have good customers, it takes a long time to collect and you are always missing opportunities to make new business? Does it take too long to recover your accounts receivables to pay your suppliers? If you answered yes to any of the questions then surely you will be interested in this collaboration.
There is a financial method called Accounts Receivable Factoring, or AR Factoring that some companies use in order to accelerate the process of collection of their accounts receivables which are sold at a discount to a factoring firm.
How does the financial factoring work? You have an invoice, which is an amount by which will exercise its right of recovery to a customer in a certain period in time, eg 90 days. The next step you approach a financial institution specializing in AR factoring to where the attorneys are named factors. That factor analyses the solvency of your business and obviously that of your customer who they would actually collect from.
The AR factoring company will later decide on a discount rate for you, at which they will buy your bills. After you study the deal and ponder whether it is beneficial for you, then you will need to sign a few paper and the AF factoring firm will make a deposit to your bank account based on the amount of bills that you gave to them.
AR Factorings main goal is to increase the working capital by allowing you to have more available cash flow in order for you to face your commitments or to increase your investments. If you are in the exporting business, for example, and you predict the newest game console will be the hit during the upcoming holidays. In order for you to invest in the large number of new video game consoles that you expect to sell, you need to get credit from your supplier. However, this supplier does not want to give you credit and expect full payment of his merchandise. AR Factoring will allow you to buy from these kinds of suppliers, because you would have working capital that you can use to purchase the products you need.
AR factoring is a legal and widely accepted tool. However, you need to be aware of the cost that it implies to your business. We suggest that if you decide to use factoring, you can transfer the costs to your customers down to a certain percentage without over charging them too much.