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IS FACTORING RIGHT FOR YOUR BUSINESS?
Although commercial factoring has been used for over
200 years, it is especially useful in today’s
uncertain economic environment. Factoring involves the
purchase of the accounts receivable of an operating
business by a third party (the "Factor"). The
Factor provides credit analysis and the mechanical
activities involved in collecting the receivables.
Factoring is a flexible financial tool providing timely
funds, efficient record keeping, and effective
management of the collection process.
Businesses factor their accounts receivable for many
reasons, but most frequently to gain greater CONTROL
over those receivables. While most aspects of a business’s
performance, i.e. inventory control, labor costs,
overhead, and production schedules can be determined by
its management, when and how the business is paid is
usually controlled by its customers ( the "Account
Debtors").
Factoring provides a means for turning your
receivables into IMMEDIATE cash! Other benefits
of factoring include:
- Protection Against Bad Debts
–
Unfortunately, a careless or overly optimistic
approach to the extension of credit by a business
owner who is sales oriented by nature, and who follows
the axiom " no business grows by turning
customers away", can lead to financial disaster.
A Factor provides you with an experienced,
professional approach to credit decisions and
collection operations by examining each Account Debtor’s
credit standing and determining credit worthiness from
a credit manager’s point of view.
- Stronger Cash Flow
– The financing afforded
by a Factor to its client is based on sales volume
rather than on conventional credit considerations.
Usually, the amount of credit obtainable is higher
than the amount offered by a bank or other lender.
This feature provides you with additional financial
leverage.
- Improved Management Productivity
– Factoring
allows you to concentrate on business. Management can
focus on sales, marketing, production, planning and
business growth, rather than credit analysis and the
administrative details of collections.
- Stronger Sales
– Factoring can give you a
significant competitive EDGE in the marketplace. Sell
your products or services more aggressively,
especially to new customers or those outside your
immediate geographical market.
A Factor is staffed with credit
analysts, collection specialists and skilled account
executives. The experience of these employees in working
with a broad range of businesses allows them to spot
credit problems and other trends rapidly, and to develop
customized programs to meet specific business needs.
Any relationship between you and a Factor will begin
with a preliminary analysis of you business, as well as
the credit worthiness of your major Account Debtors. As
a general rule, Factors will NOT be too concerned about
your credit.
After a decision is made by both parties to enter
into a factoring arrangement, a Master Factoring
Agreement is signed. This agreement sets forth the
details of the factoring arrangement. As specific
accounts receivable are purchased, this information is
entered into the Factor’s computer file enabling the
Factor to generate invoices if so desired. The Account
Debtor is notified to make payments directly to the
Factor.
When accounts are purchased, the Factor makes an
immediate cash payment of a substantial portion due on
the account (usually 80% or more) to you. The Factor’s
fees and any brokerage fees are deducted, and the
balance of the account is designated as a reserve. As
payments are received from the Account Debtor, the
Factor is compensated for the cash advance originally
made to you.
When the Account Debtor has paid the amount due to
the Factor, the reserve (less applicable fees) is
remitted to you on the terms set forth in the Master
Factoring Agreement. Reports on the aging of receivables
are generated on a regular basis. The Factor follows up
with the Account Debtors if payment is not received in a
timely fashion.
Because of the Factor’s experience in performing
credit analysis and its ability to keep records, produce
reports and effectively process collections, many of our
clients simply purchase these services for a fee rather
than selling their accounts receivable to the Factor.
Under these circumstances, the Factor can even operate
behind the scenes as the client’s accounts receivable
department without notifying the Account Debtors of the
assignment of accounts.
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