Businesses can exchange their accounts receivables for some money at a fee with another person called the factor. This whole process is called factoring. Initially this process was never considered a good source of money for any business but just for those, which were struggling financially. But these days it is one of the acceptable sources of raising money for many businesses. For any business seeking to raise money, it can do so by way of
factoring receivables.
In a company balance sheet, accounts receivables are also classified as finance assets and for that reason they can be used to get money for various uses within the business. All one needs to do is to get the other two parties to the transactions, the parties to a factoring process are the factor, the debtors and the seller. What the seller needs to do is to transfer its debts to the factor that will give him cash and do the collection himself.
In this process a firm does not consider the credit of a company, so they don't need to have financial security to qualify, only the accounts receivables. This makes factoring a good source of investment, especially for small firms that may have difficulty securing loans from banks.
When businesses need money within a very short time, this process of
accounts receivable financing is preferable as there are no long procedures to follow in order to get the money, it can also be a long term process of raising the money as long as one is still in business and still has receivables.
There are also companies, who fail banks criteria of getting money through loans either because they are still small, or they do not have enough security to give to the bank or their capital base is not big enough. These companies can use factoring to raise money to improve their capital base or to cover all other financial obligation to enable them qualify for the bank loan for further business expansion.
It also removes the responsibility of collecting the receivables from the business to the factor, which in turn saves the business the administrative costs of collecting, and the time needed to do the collection. Also the risk that the debtors could default on the payments is transferred to the factor. The factor is normally more experienced in collecting debt.
The other good thing is that there is no long-term contract with the factoring company making it a very flexible source of financing, as there are no obligations and responsibilities to the business as a result of this process of raising money. Once the transaction has been done, there is nothing else expected from the business.
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Overall,
invoice factoring is a good way to get money especially for small business that need more money for expansion and may not qualify for a bank loan. Since
asset based finance will help them meet their other short term obligations and in the process strengthens their financial base and in so doing can now qualify for a bank loan.
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