A company may use the factoring method when it wishes to entrust its claims to a financial institution in order to obtain reimbursement. Factoring can be very useful for companies that charge professionals, who want to outsource the management of their receivables (what customers have to do). Factoring is otherwise known as accounts receivable financing.
What is Factoring of Accounts Receivable?
A credit institution assumes responsibility for the recovery of a company’s claims or receivables, that is, payment of invoices, payment reminders for late clients. This institution is called the Factor. The company can then delegate to 100% the administrative and sometimes unpleasant management of the collection of its trade receivables.
How Factoring of Accounts Receivable works ?
This is a contract between a company and a financing institution / credit institution (factor). When the company issues an invoice, the funding agency will settle the amount in question, taking a commission for each transaction. The company also entrusts the administrative management of debt collection to financial organizations. That is to say, it takes all the necessary steps to arrive at the settlement of the invoices. This method may be particularly useful for clients who are late, or who do not pay at all. Most banks have factoring subsidiaries of their own.
Why to use this method of Factoring of Accounts Receivable? Advantages and Disadvantages of Factoring :
The factoring method allows companies to receive payment directly from an invoice issued to another professional. This method only works for business-to-business transactions, not business-to-customers. The credit agency (factor) will then pay the amount due. As a result, the company using this method does not have to wait for payment due date to receive the payment. This allows it to maintain its cash flow.