For many types of business, a considerable part of a company’s income is generated through accounts receivable. Start-up businesses, temporary staffing agencies and manufacturing-based businesses often set up product or service contracts with individuals or other companies. Depending on how a company sets up its payment schedules, there’s typically a delay in payments for cash due on invoices for product orders or services rendered. In effect, these delays in payment tie up a company’s cash reserves. Businesses that rely on invoice-based revenue can use factoring as a way to have more control over their income earnings.Read more →
The success of a business depends on its ability to coordinate and manage incoming assets with outgoing costs on a continual basis. Normal delays with invoicing and payments can place a company in a vulnerable position when it comes to having cash on hand. Accounts receivable factoring helps businesses better manage their income earnings on an ongoing basis. Read more →
How It Works
The money tied up in an invoice or receivable is essentially a financial asset. Not surprisingly, there are companies that specialize in handling “receivable income” assets. This process is known as factoring. In a nutshell, factoring companies purchase a certain percentage of a business’ receivables at a discount price. This means a business can receive payment on an invoice much sooner than their payment schedule with a customer will allow. In exchange, the factoring company collects the full amount of the invoice from the customer and thereby makes a profit on the discount price paid to the business. So invoice payments are made directly to the factoring company rather than to the business.
The ebbs and flows commonly associated with any business endeavor can place a company in a vulnerable position when there’s not enough cash on hand to cover upcoming expenses. And while the money tied up in outstanding invoices is considered income earnings, the contract terms made with different customers often vary in time frames.