What Should I Take Into Consideration Before Making A Factoring?
Has it ever frustrated you to miss opportunities in making good business because you are never able to collect from your customers? Does it bother to have good customers and still not being able to pay your suppliers? If you answered positively to any of these questions then you should take a closer look into Accounts Receivable Factoring or AR Factoring.
AR factoring is a financial instrument that allows your company to sell the bills that your customers owe you in concept of accounts receivables at a discount in exchange for a payment. The financial institution will give you money on the basis of your accounts receivables and they would manage your portfolio for you.
How does the financial factoring work? You have an invoice, which is an amount by which will exercise its right of recovery to a customer in a certain period in time, eg 90 days. The next step you approach a financial institution specializing in AR factoring to where the attorneys are named factors. That factor analyses the solvency of your business and obviously that of your customer who they would actually collect from.
The AR factoring company will later decide on a discount rate for you, at which they will buy your bills. After you study the deal and ponder whether it is beneficial for you, then you will need to sign a few paper and the AF factoring firm will make a deposit to your bank account based on the amount of bills that you gave to them.
What is the objective of the AR factoring or accounts receivable factoring? Factoring aims to reduce billing cycles and thereby provide liquidity to the company. The key benefit is having the money faster, and it is very useful when you have opportunities for business which requires giving many turns to your financial cycle. For example, let us suppose you are an importer of the most successful video game console and Christmas is coming. Surely you would be interested to have the cash to pay your supplier, who does not give you credit. You will then buy a large quantity of video game consoles and enter into AR factoring and quickly recover the money to pay your supplier and buy more consoles.
Beyond the legal widgets, you should take into consideration the financial cost that this generates. It is recommended that before incurring any cost, you should transfer it to your client in the selling price of your product that could otherwise be lost when attempting to retrieve the money quickly.
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