Wednesday, September 30, 2015

The Main Reason Why Enterprises Need Business Receivable Factoring

By Connor G. Schiffman

Factoring is a concept used in modern business ventures to refer to the action of selling receivable accounts to third party companies who have commercial interests at hand. This is a swifter way for enterprises to acquire finances as compared to the normal payments made by their customers during any transaction activity. This is the reason why knowledge regarding business receivable factoring is important.

The third parties that buy these receivable accounts are normally known as factors for they determine the speed in which funds will be acquired. The attributes related to this procedure vary depending on the enterprise seeking to engage in it. There are time limits and interest rates based on the finances obtained by an enterprise.

Factoring payment modes are categorized into two. Firstly, a third party may receive their cash in lump some together with interests accumulated. In this occasion, money is paid back in its totality to the lenders. The second approach is via clients who purchase services and commodities from enterprises. This indirect approach deducts the funds at a specific rate until all the money is repaid.

There is a major difference between factoring funds and ordinary loans. The contrast is evident through the policies formulated by both funding services. Banks are normally strict on the amount of money, time it should be repaid and the interest rates to be associated. Factors are less strict on these conditions for they provide money only after being assured of the profit making ability of an enterprise.

Factors use invoices recorded after customers purchase services and commodities to assess the financial stability of enterprises they are lending money to. This approach is vital for it also determines the duration it will take for the money acquired to be fully repaid.

Receivable factoring in business usually takes place within twenty four hours thus a very effective way of raising urgent cash. Cash flows in an enterprise can be amended in the long run and this usually translates to maximum profit making. This financial tool however is invisible on balance sheets because typically, it lacks the typical debt resemblance.

This financial activity began several decades ago as trade was at its budding stages from all around the world. Its need rose as urbanization was taking place because during this phase, more profit oriented enterprises were being built. Increasing consumer needs driven by their tastes and preferences also necessitated this need.

All in all, enterprises dedicated to meet public demands are part of the diverse economic activities initiated by man. These ventures may at times require extra funding to boost their service delivery and this is the main reason why factoring is essential in the commercial sector.

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