For any small business, maintaining a cash flow is very important. The primary source of income for any small business is through sales of its primary product offerings. In order to maintain a desirable position within the industry, many companies offer sales on credit to customers. This allows them to record income quickly, though cash is not received immediately. Most credit customers only pay when the goods are sold from their stocks, which takes anywhere between 30 to 60 days. It might take longer. Some might not even pay at all. That is why it is accepted practice in the accounting world to create a provision for doubtful debts for all debtors who haven’t paid for more than a year.
Unfortunately, the delays in cash collection can have a serious impact on a company’s working capital. Because cash flow is affected, a business finds it difficult to finance daily activities or invest in expansion. For smaller companies that rely mainly on cash from sales, a large figure in the debtors’ account could spell potential doom. That is why factoring company account is a viable option.
What Does Factoring Company Account Mean?
Factoring company account simply means leveraging a company’s account receivables/invoices in order to gain access to short-term working capital. Companies that offer factoring services generally require a minimum sales figure of $25,000 per month. This is important because it helps the factoring company conclude that the company will not run out of business shortly afterwards.
Factoring company account is regarded as common practice in the world of business nowadays. Even Fortune 500 companies factor their accounts from time to time to generate more working capital. This allows the business to focus more on business activities than worry about credit collection.
How Does It Work?
Factoring company account is actually quite simple. A business owner must approach a factoring company and show their financial statements and accounts. The factoring company will then analyze the credit risk involved in factoring and provide the client with a discounting figure. This figure is usually expressed in the form of a percentage. Depending upon the credit risk involved and the age of the receivables, it can be as low as 80% of the total leveraged receivables.
Once both parties reach an agreement, the factoring company issues the payment against the company account and assumes the credit risk of collection on behalf of the client. Whenever a payment is received against the company account, the financing company releases that payment to the client after deducting a fee and interest for their services. Most capital funding companies give approval in 24 hours, with funding being provided in a few days.
