What is Factoring
Factoring indicates the relation between a financial institution (called as the ‘factor’) and a business organization (called as the ‘Client’) who in turn sells the goods/services to its customers (called as the ‘customer’), whereby the factor purchases book debts of the client, either with recourse or without recourse, and in relation thereto controls the credit extended to the customers and administers the sales ledger of the client. In non-technical language, the financial service in the form of factoring tries to provide the services which the marketing department of an organization will be undertaking. The risk of non-payment by the customers may be assumed by the factor if the factoring type is without recourse.
Factoring can be done either in small business as well as for large scale businesses, But Through this article we will came to know that how factoring is efficiently done in small business and here are some best tips for small business factoring :-
1. Since we know that factoring is a way in which a company finances its requirement of working capital in respect of receivables, so to expand small business and meets its financial requirements it becomes very easy for the company to take short term loans with a suitable repayment time.
2. In a small business, the factor bank or financial institution can easily grant loans and advances against the invoices deposited with it for collection under the agreement and if the invoices are not paid by the purchaser, the seller can deposit relevant amount in respect of such dishonored invoices.
3. In addition, smaller businesses do not have the resources to collect their outstanding invoices efficiently. Transferring the debt collection to a factor is an easy way to give your cash flow a shot in the arm. A bonus is that customers may pay up more readily to a factor.
4. Small business factoring solves the cash flow issue, therefore, the receivable factoring is the best option for those entrepreneurs who want the constant cash flow to purchase the tools or machinery, pay the other bills or rent.
5. In addition to providing immediate cash for invoices, a good factoring company performs credit analysis on new and existing customers, follows up on invoices as they become due and provides timely updates.
6. A very important criterion when selecting an invoice factoring company is choosing a company that will give the appropriate level of service. The industry is very diverse, and there are many factors that charge very low fees and provide a very impersonal ‘mass approach’ to service.
7. All these points should be considered before factoring for small business
a) The financial strength of your customers
b) Your monthly volumes
c) The duration of your contract and
d) The payment cycle of your receivables.
8. A factor zone should always be diagnosed while factoring and when selecting a factor, always ask about the size of their typical client. Ideally, for smaller business it should not be significantly below or above that figure.