When you do a business you would experience some problem regarding cash flow at some point or the other. There are some companies that would face problems while starting the business while other might face problems when they are in the expansion phase of their business. There are many options that can be followed to improve the cash flow like concentrating on the collection effort or taking the help of professionals for forecasting the business and for budgeting. But for some companies these options wouldnt work out and they have to turn to factoring.

Factoring is a process in which the accounts receivables (invoices) are sold to get instant cash. Factoring is fast and an easy way to obtain cash for companies that are undergoing cash problems. But as similar to any other type of financing this also comes with a fee. The factoring company either a bank or a commercial company would charge a fee for the services rendered and this is why it is considered as a better short-term solution as compared to a long-term solution.

Let us understand how does factoring work. A factor i.e. the company that gives out the finance would first analyze and assess your invoices and verify the credit worthiness of your customers. When you opt for factoring as a means of finance you should be prepared with all the documents and the accounts of the company. The factoring company would bother more about the payment practices of your customers as compared to yours and hence you are required to be prepared with the financial statements, a certificate of incorporation, or a partnership agreement, an accounts receivable aging report, the proof of insurance and the invoices and the various required business documents. Since the company takes the responsibility of collecting your receivables they would want to assure themselves that your customers make their payments on time.

Once that the factor and you reach a conclusion as to which factor does he want to buy then the factor would give you an advance for example it might pay you an amount as much as 80% of the amount of the invoices and once

the customers pay their invoices the remaining 20% would be reimbursed. But the factor would deduct the fees from the amount that is reimbursed later. The fees of the factors would vary and it would depend on the size of the invoices, the credit worthiness of the customers and the days in your collection cycle. Typically you should be ready to pay an amount as much as 3-7% of the total invoices that the factor collects.

Before you decide on factoring as your means of financing you should consider the pros and cons of the option. Factoring can be a good option in case you need the finance immediately. After the factor has received your application and has assessed your invoices then you can expect to get the cash within a weeks time. But you should also consider the disadvantages associated with factoring.

• Usually when customers would see the name of the factor then they would consider that your business is not running properly and is unstable.

• A factor is capable of turning down the invoices of the customers and this would be proved as un-credit worthiness and this can make the factor stop your payments on the accounts that are remaining to be paid. In case you have a good number of customers that do not pay their invoices on time then you should not consider factoring.

• You might discover later on that the cost of factoring is more than taking a short-term loan. This is the reason why most of the companies consider factoring to be their last option in case they are unable to secure loans or lines of credit from banks and other financial institutions.

• In case you have small amount of receivables then most of the times factors would not want to work with you. Most of the factoring companies would opt to do business with companies that have an amount of approximately $10,000 or more as monthly invoices.

Before you take any decision about financing you should talk to your financial advisor or your banker. You should consider all the options before you reach a decision. Factoring is a simple process that would use your invoices as your asset and would give out the money to you. The factoring company would give you the money on the basis of the amount of invoices that you have. However you would have to pay a small amount of fees for the services of the factoring company.

With factoring you are supposed to carry out your business as usual but the factoring company would collect the bills from the customer of your behalf. The factoring company would provide you finance in the beginning and once they collect the amount from the customers they would reimburse the amount to you. The factoring company would wait till the customer pays the invoices. Factoring would give you immediate finance but you should consider factoring in cases only where you can afford to. Qualifying for factoring is an easy task and you can easily get the finance. The most important requirement is that you do business with customers that are credit worthy. Hence if you have good and trustworthy customers then you can consider factoring.

Business Receivables Factoring is a good option to finance your business and help it expand your business to newer heights.