5 Steps in Factoring Receivables
Commercial institutions and governments may sometimes take too long to pay for services you offered them. Invoices may have a repayment period of between 30-90 days, meaning that a business may run low on cash that it requires to run efficiently. Companies may require funds to keep up with payroll, maintain a steady growth, cover their debts, maintain production, or make upgrades in the company. Accounts receivable financing is, therefore, an alternative financing method that provides short-term working capital through the sale of the businesses invoices to a third party financing company (factor) for a discount.
Understand Factoring Finance
Invoice factoring Canada was not popular in the past, but its use has risen lately due to increased borrowing rules posed by the banks and other lending institutions. The institutions don’t consider the credit balance of the business owners but rather that of the end customer. The invoice acts as collateral and the factor minimizes the risk by not paying a 100% upfront fee. Business factoring services are either recourse or non-recourse:
• Recourse factoring- the factoring receivables fund the invoices, but they require you to cover the costs of invoices that remain unpaid for a specified period. It is the most common and cost-effective method of factoring.
• Non-recourse factoring- the business owner is not liable for any delinquent accounts or unpaid invoices. The factor scrutinizes the creditworthiness of the end- customer in this factoring due to the risk that they carry. They are also likely to charge higher rates.
The Steps in Factoring Finance
Invoice factoring is one of the easiest ways of financing your present and immediate cash needs. Below is a procedure to follow during factoring:
1. Send invoice to the customer
The invoice should indicate the net terms, which varies between 30-90 days after which you expect them to cover the costs.
2. Sell the invoice to a factor
Consider looking for a factoring company if you cannot wait for the expiration of the net time on the invoice. The factor then conducts due diligence to determine your eligibility for financing by checking the end-customer credit and checking the credibility of the invoice.
3. Receiving the advance cash from the factor
The factor gives and advances rate once they confirm your eligibility for financing. The advance varies between 70-90 percent with the size of your transaction, the risk parameters, and the nature of your company serving as the points of reference. The factor may also send a notice of assignment to the client indicating you have assigned the factor as the recipient of future payments.
4. The Customer Payment
This involves payment of the amount on the invoice depending on the terms that you had.
5. Settling of the remaining balance by the factor
The factor will only cover the remaining payment after the client has cleared all the balance.
Therefore, anyone with bad credit and in need of urgent funds should consider selling their credits as one of the ways to acquire cash. The factors may charge a fee for their services, but it is the best alternative to waiting for 90 days to collect your payment. The FundThrough website has more relevant information and resources available on their website.