80% of the sales invoice value is drawn up by the exporters at the period of goods delivery and raised sales invoice value, this is considered the most common method to help accelerate the cash flow that is used by exporters.
What is Factoring Finance?
Factoring Finance, which is also called receivables factoring or debtor financing, is a financial transaction and a type of debtor finance. The financial transaction happens when a third-party, or when another company buys receivables or invoice from a company, the companies who buys invoices are called factor.
One reason why companies allow debtor financing is to quickly receive cash. The receivable accounts are discounted to allow they buyer to make a profit upon the settlement of the debt. Rather than to wait a month or two for the customer to pay, the factoring finance transfers the ownership of the receivable account to another party who will chase up for the debt. With this, the factor is required to pay a small percentage of the amount once the debt has been settled.
What are the ADVANTAGES of Factoring Finance?
- Other than it provides a quick and large cash flow, it can be a cost effective way to outsource the sales ledger and reduces the administrative cost of the company.
- Non-recourse factoring can provide insurance from bad debts from the debtors of the company.
- Useful information regarding the credit status of the customers may be given by the factors, thus they can help you with business trade with better quality customers, improve debtor spread and can help negotiate better terms with the suppliers.
- Liquidation is improved since the bank collects and gives the money. As the orders are invoiced the money is then released and is available for capital investment.
What are the DISADVANTAGES of Factoring Finance?
- It is more suitable for small companies than those who have nationwide franchising.
- Factors restrict funding against poor quality debtors or poor debtor spread, fluctuations of the funds may need to be managed.
- There are customers who view factoring as an indicator of an ineffective and inefficient company, while other customers also prefer to directly deal with the primary company.
- Customer service of the factors can also affect the company’s reputation, thus make sure to find a reputable factor.
- Ending a contract with a factor requires you to pay off any money they have advanced on invoices, moreover, if the customer has not paid yet.
Factoring Finance is best with an efficient and effective company.