Bills factoring are the financial method helping the companies to increase the cash inflows. Though many people are unaware of this technique, it is highly beneficial for companies who are unable to acquire a business loan, equity, or adequate finance to run their business. Obtaining funds for any business is not an easy task. Lenders look for a type of business that has high earning potential or the creditworthiness of the business or else funding via the traditional method is a lot difficult.
Factoring is many a time seen as the last resort of financing, though it is not always true. For the business owner who fails to obtain funds or any type of funding, factoring is the best method to get quick finance. It is best for the businesses which sell the product, supply, or service just for some fees. This is why factoring is also known as the accounts receivable financing as the companies can sell all the outstanding or unpaid invoices from the buyer to any entity called as the factor.
Who are the persons engaged in the factoring procedure?
- Seller: The business entity that sells the accounts receivable or outstanding invoices to the financial institutions at the discounted rates is referred to as the seller.
- Receivable: The invoices or the accounts receivable that the business sells to the factoring companies are known as the receivables.
- Debtors: The individuals who owe money are known as debtors. These are the individuals whose invoices are sold.
- Factor: They are the financial institutions that collect and purchase invoices or unclosed accounts from the seller.
Procedure of factoring
In the mechanism of factoring, seller enjoys the options to sell off their invoices at a discounted rate to the factor. These factor purchases the invoices and provides instant cash facility in exchange of it. He then further attempts for collecting the money owed on the outstanding invoices held from the debtors. However, the debtor might pay or not pay the factors.
There is no doubt that obtaining a loan or cash is a complex task. However, the Freight bill factor acts as the bridge financing method without any delay.
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