subject: Business Factoring Can Be Truly An Edge For Business Owners [print this page] Business factoring is a type of financial service where a firm sells or transfers its accounts receivable to a factoring company, which then becomes the principal and not an agent.
There are some differences between a bank loan and factoring. Firstly, in factoring the importance is given on the value of the amount to be received and not the credit worthiness of the business. Secondly, factoring is not a just a loan, it is a purchase of a financial asset. A loan from a bank is only two sides working together and factoring means that three are involved you, your debtor, and the factor.
A factoring alliance is between a group of two to three sponsors who come together to fund a business. The members are generally specialized in different fields of business and when they come together they offer the various specializations under one umbrella. They are like a one-stop- shop who can cater to varied demands of a business.
Factoring has become a very lucrative business lately and there has been an entry of a large number of players. This has helped in making the rates very competitive. Factors purchase the accounts receivable from the business. This purchase is at a discount from the account's actual value.
Factoring is a type of outsourcing wherein the business sells its accounts receivable to a factor. This reduces the effort and labor required to recover money from the customers. The time saved can be utilized in various other business activities that need your personalized attention. Also, in factoring there is immediate incoming cash that can be recycled.
However, all is not smooth in this business too. A discount means an obvious reduction in your profits. Also, when you take in a factor, it reduces your scope for borrowing money from the market or bank as it shows in the books as a debt and reduces your credit worthiness.
It has to be noted that it may not be a very smooth transaction when you try to end a relationship with a factor. As the factor is recovering the accounts receivable for you, there may still be customers who have not yet paid. Another factor to be taken into consideration is that customers can be very finicky. They may not like to have a factor between then and you. So, adequate measures have to be taken to not upset any customer because of your alliance.
Another factor that cannot be ignored is that the factor has its own organizational culture. When any organization acts as your organizations representative they have to reflect your culture to your customers. The customers may take the factors actions as your actions and be slighted. So, while taking in a factor is a good idea, measure its advantages and disadvantages adequately before venturing out for business factoring.
