Factoring is the best option for an organization to control receivables. Factoring occurs when a business sells its accounts receivables to a third party funding company (a factor) in exchange for a percentage of the receivables in cash. The factoring funding company pays the business selling its accounts receivables a certain percentage of the total amount of receivables sold.
Transactions such as factoring are good for an organization seeking to control its receivables because it provides an organization with quick cash on its receivables instead of waiting up to 30 or 60 days for customers to pay. Factoring allows an organization to build up its cash quickly and easily thereby making it easier for it to handle customer orders, pay employees and re-invest in the business.
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Despite the diverse options that companies can use for funding, factoring offers a quick payment on a company’s account receivables. The long wait for processing traditional loans and customer payments can limit the amount of cash an organization has on hand to achieve its financial goals and meet its expenses. For instance, given that the accounts receivables of a business average $50,000 monthly. However, the company does not have anything to show at the end of the month simply because customers take longer, between 30-60 days, to pay. Therefore, factoring enables a company to get cash on these invoices immediately.
Overall, both small and big companies need credit to support their operating expenses, meet payroll and pay inventory. At times, companies are caught up in situations whereby they need cash quickly. Although there are other forms of funding such as loans and credit lines, these traditional styles of funding are associated with many difficulties being approved. Therefore, factoring or accounts receivable funding remains the best option that suits an organization that wants to control its receivables.
