Business ventures worldwide have adopted newer cash generation methods aimed at retaining their financial status in the economic sector. One of these methods includes financing from third parties and this is called factoring. Third parties have the capacity to lend stipulated amounts of cash to prospective enterprises anytime under minimum restrictions. The concept of business receivable factoring therefore needs to be redefined to enhance comprehension.
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.
Funds allocated during this process can either be refunded directly or indirectly. Direct modes entail paying exact amount of cash borrowed inclusive of the interests. On the other hand, the indirect ones include the factor accessing funds at intervals through customers who receive certain goods and services.
Money obtained by an enterprise from factoring is very different from that obtained from a bank in form of loans. This is brought about by the funding agreements stipulated in both practices. Funds from factors are quite flexible as compared to those gotten from banks on lending occasions. The flexibility can be found in the interest rates and other payment conditions.
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.
Factoring cash can be obtained within a day after its application and this is also another reason why it is mostly preferred by profit oriented enterprises. This short term perspective helps in fixing money issues that may have been recorded thus efficiency in goods and service delivery. In addition, this amount of money is not indicated in the balance sheet as a debt.
Historically, ancient business ventures employed this financial tool to help in fixing cash flow that rose in their daily operations. Most cash flows required urgent attention hence quick funds were to be raised. Industrial and technological revolution also boosted this practice as demands for better goods and services rose worldwide.
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.
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.
Funds allocated during this process can either be refunded directly or indirectly. Direct modes entail paying exact amount of cash borrowed inclusive of the interests. On the other hand, the indirect ones include the factor accessing funds at intervals through customers who receive certain goods and services.
Money obtained by an enterprise from factoring is very different from that obtained from a bank in form of loans. This is brought about by the funding agreements stipulated in both practices. Funds from factors are quite flexible as compared to those gotten from banks on lending occasions. The flexibility can be found in the interest rates and other payment conditions.
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.
Factoring cash can be obtained within a day after its application and this is also another reason why it is mostly preferred by profit oriented enterprises. This short term perspective helps in fixing money issues that may have been recorded thus efficiency in goods and service delivery. In addition, this amount of money is not indicated in the balance sheet as a debt.
Historically, ancient business ventures employed this financial tool to help in fixing cash flow that rose in their daily operations. Most cash flows required urgent attention hence quick funds were to be raised. Industrial and technological revolution also boosted this practice as demands for better goods and services rose worldwide.
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.
About the Author:
Connor G. Schiffman has 27 years of experience in commercial lending including factoring, asset based lending, and banking. Connor helps readers manuver through all the account receivable options providing practical and useful knowledge to better understand all your lending options. If you want to learn more about Factor Financing he recommends you check out www.receivablefactoring.net.
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