Have you ever heard about Factoring or factor companies factoring or debtor financing? It is a concept as per which, a company purchases a bill or invoice of another company.
There are many benefits of factoring. It relieves the company of debt by providing them with immediate cash or working capital to continue with the routine job such as trading. The job of the factoring company is to retrieve the debt for the full amount along with the profits from the client. The factoring company charges an additional fee, which is just a small percentage of the total bill amount as their service charge. This fee is taken only when the total debt is settled. The factoring company sometimes also offer a discount to the business company.
It is a very common method of financing which is used by many exporters and transport people. It helps a lot to create a cash flow for the businesses. This process allows the transporters to advance at least 80% of the total invoice’s amount. By getting this amount, they can receive various goods and when imperative to run their business. The remaining amount they get after deducting the factor’s fee.
The freight factoring industry has become very competitive, and most of the transportation companies are seeking factoring services at a rate of 1% to 4%. The rates will depend upon the amount of invoice, the creditworthiness of your clients, and the reputation of the factoring company in the market.
Normally the advance amount can range somewhere from 80% to 99%, depending on the type of transaction like it is single- instalment transaction or two-instalment transaction. You can negotiate the advance amount, as per your needs. Lower the advance amount; lower is the cost.
Types of factoring
There are two types of Receivables financing companies. One is the recourse option, and the other one is the non-recourse. Factoring companies may offer either a recourse program or a program without recourse. In the Recourse factoring, the business company has to bear the responsibility for the payment of an invoice if the client turns out to be insolvent. So, if the factoring company cannot collect payment from your client, the business company will have to bear all the loss.
In the non-recourse factoring option, the factoring company will take the entire responsibility and credit risk for collecting the invoice.
All the factoring companies offer both recourse and non-recourse options to the business companies. The non-recourse factoring charges a higher fee of the factoring, as the risk is higher in the non-recourse factoring. So, this is a more costly option.
Before selecting the type of factoring option, you can go for, do understand the details of both the options and all the terms associated with them too.
