The factoring as a process has long been relied on by business houses. The selloff procedure of company’s assets as account receivables generates and fulfills the immediate need for cash. The generation of cash carries much importance as varying degrees of business need triggers the sudden requirement of cash.
Small Business Problems:
The smaller businesses often suffer the most due to this fact; the absence of cash prohibits them from utilizing business opportunities. The lack of credibility of small business houses often prevents them from availing loans from conventional financial institutes like banks.
The Cash Generation Means:
The process of factoring that primarily aims at selling off of accounts receivables by the business concern to a third party in exchange for cash. The cash meted out by the third party or the factoring company to the business concern, deducts a small amount as its fee. The accounts receivables that are sold off are the unpaid invoices.
Topic of Invoices:
Invoices as a transaction instrument normally get issued by the company or the seller to the customer or the buyer. The customers at times choose not to pay the invoices that remain unpaid as a debt to the issuing company. Factoring company hereby extends a helping hand by buying all the unpaid invoices from the seller at a discounted rate. An unpaid invoice can last over a period extending from a month to two months to a maximum of three months. The factoring company later collects the amount that is to be recovered from the buyer or the customer.
The invoice factoring is a popular mode of cash generation for various companies from varying fields like the manufacturing, machine shops, accounting, I/T etc. The smaller businesses benefit more from the invoice factoring as, the factoring companies promote to create more invoices, get funded in the process and stay ahead.
Importance of Factoring:
The factoring helps companies to meet business demands and create enough disposable cash. The disposable cash created helps to meet the payrolls, electric bills etc. The most use of the disposable cash remains in the utilization of business growth. The resultant popularity of the factoring process can be seen in the growth spurt of factoring companies all over the world as that of small business funding in Houston.
Better Process than the Prior:
The invoice factoring is considered as a better financial funding option than that of banks. This is because it is basically about a funding process that is faster, simpler than that of conventional means like banks with no holds barred approval. Business houses, which has problems generating a smooth flow of cash as a result of long payments cycles and lumpy money syndrome benefit from factoring.
The factoring as a process benefits all the three parties involved in the total process.