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WHAT IS FACTORING
ACCOUNTS RECEIVABLES ? |
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Factoring, also
known as "cash for receivables," is the conversion of a business
accounts receivables into immediate cash by the outright purchase of its
receivables, at a discount by a factor. |
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Factoring is not a
loan and is not based on a business ability to repay the money advances. The length of time in business is NOT a
consideration. The debt to equity
ratio is NOT a consideration.
Instead, it is based on the ability of your customers to pay what they
owe. Once a factor purchases the
receivable invoice, they assume the responsibility for its collection. The factor is also responsible for
accounts receivable management functions, such as credit investigation,
accounting and bookkeeping. As
compensation for these activities, the factor purchases the receivables at a
discount. |
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The discount fee is
usually dependent on the amount purchased, the credit worthiness of the
debtors, and the turn around time. Fees
can vary substantially but are usually less than most business owners expect. |
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Frequently, a
commercial bank cannot provide all the loan funds a growing company
needs. A balance sheet is not liquid
enough, or it can't clear off the bank debt every 6 or 12 months. A factor can provide funds to clear off
bank loans periodically or make additional bank credit possible by
guaranteeing accounts or replacing accounts receivables with cash |
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Once a factoring
contract is entered into, you will submit orders to the factor for credit
approval before shipping. The
factor's credit department becomes your credit department. When the order is approved, you will
receive up to 80% of the proceeds with the remainder retained by the factor
as a reserve against loss from complaints and returns. This is withheld to protect against credit
losses, since the factor purchases the accounts without recourse. Usually the factor will settle the account
each month and pay the proceeds due, less cash discount. |
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One of the biggest
advantages of factoring is that businesses get immediate cash (from 70 -80%
of the face value of the invoices) within 24-48 hours, which means you can
accelerate your cash flow by speeding up payment of the receivables. You will have an immediate source of funds
for operating expenses and future growth.
You will be able to use your own, hard earned cash without having to
wait 30, 60, 90 or 120 days to collect from customers. Additionally, since only receivables are
used as collateral for the cash advance, other assets (such as real estate
and equipment) can be used for future borrowing. |
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Cash flow is
probably the most important element in the success of a business. Accounts receivables may be the biggest
asset on a company's balance sheet.
They also represent the business best source of operating capital that
is in permanent disuse. Factoring
improves cash flow. A business can
use cash currently tied up in receivables to increase sales and take
advantage of supplier discounts.
Factoring accelerates cash flow by eliminating the time lag between
the delivery of goods or the performance of a service and the payment for
it. Most businesses have to pay their
expenses before they can collect their receivables, disrupting cash flow. |
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Little Oaks Finance
Brokers can help you determine if factoring your company's accounts
receivable is the right option for you.
Once you have come to a decision to factor your account receivables.
Little Oaks Finance Brokers will package the transaction in accordance with
the factors requirements. Little Oaks Finance Brokers will select from a wide
variety of investors to find the right match for your company. Whether your company is in the start-up
phase or you have out grown your cash flow, Little Oaks Finance Brokers can
help factor your invoices and get the cash you need. |