Bank loans, single invoice discounting and business factoring are three of the most common funding methods obtained by entrepreneurs and businessmen in the corporate world today. Each one has an advantage to them depending on the situation, the gravity and hastiness of the need and the ability to pay back what is borrowed or given in return.
Of the three, business factoring has seen to be growing at a large rate nowadays. The reason for such is because businesses are somewhat shying away from obtaining debt. Bank loans obviously are while invoice discounting involves a loan too as it is the invoices which are used as collateral for the advance received. With factoring, what the company does is sell their receivables which have been locked up in their respective invoices. The financing institution called a factor will then provide for their value in part. They will then collect from your customers and after which will forward to you any balance remaining less the fees involved. To help you understand the concept better, below are the four (4) characteristics to business factoring.
- It is an off balance sheet financing method. Here, your balance sheet is not adversely affected to the point that it appears less appealing to both the board members and investors. This is because once invoices have been factored, the value of the receivables are transferred as cash. Unlike in bank loans, cash does increase but your liabilities go up as well.
- It involves fees and not interests. Because it is in no way a loan or even close to it, no interest expenses are involved. What the company pays for instead are the management or operating fees which are to be deducted from the value of the receivables forwarded to you.
- The period often lasts from ninety (90) to one hundred and fifty (150) days and in other instances more than that depending on the factoring firm. This will usually involve a credit investigation not on you but on your customers. The factor will look into whether or not they have the ability to pay what is due them.
- Leverages on the financial strength of your customers. Business factoring leverages not on your financial standing but that of your customers. The reason for such is because the factor will not collect from you but on your customers. The burden of payment lies in them so you are freed of any liability whatsoever.