Debt Factoring means selling your accounts to another party. This third party will study your invoice deeply and depending on that, they will provide you finance. This is the main cycle of this program. These companies are known as factors and they provide many services like debt collecting, ledger management etc. This process basically used to get instant cash from factor. Through this article, I will guide you about debt factoring, its type and how to choose factor properly.
A Step by Step Guide to Debt Factoring
Debt Factoring is a way through which a business can get instant cash from some renowned organization by selling all their account invoices to them. They mostly take around 24 hours in providing cash after submission of invoice. This process provide fast cash depending upon your invoice. This organization is known as Factor. These factor provide many facilities and services to your business. This process is mainly for cash traders or retailers. Factors can be any bank subsidiaries, financial institution or any private firm.
There are basically two types of factoring - Recourse and non-recourse factoring. In first type, factors are not responsible any bad credit. In simple words, if your customer refuse to pay them, they will ask money from you. This process is cheaper than second one and this type need very few requirements related with your customers as they don't take risk of bad debt. In second type, factors take risk of bad credit. This is the main reason because of which this way is expensive than first one. Factor have all rights to deal with customers including legal action.
You have various options of factors to choose from. You should consult various factors before taking final decision. An association named The Asset Based Finance Association (ABFA) supply complete list of factors including information about their details, turnovers and services provided by them. There are several factor brokers also available in market. They will work for free from yours side and will get some commission from factors. Cost of factoring is not very expensive but quality of factor should be kept in mind while dealing with them.
Don't make yourself blind folded before joining any factor neither go with the words of brokers. Proper research should be done before finalizing any factor. Ask factor about their previous clients and don't hesitate to contact them. Ask several queries to your factor like their way of collecting payment, their working structure, way of handling disputes, their previous experience with your business line, their way of communication with customers and last but not the least, what if you want to end this agreement. Also check notice period before signing final agreement. Mostly companies have notice period of 3 months. If they are offering notice period of more than 5-6 years, you should negotiate them and try to bring up to 3 years. These queries must be cleared before making final decision.
Factoring is very long and complex financial structure. This process has major impact on your business and relation with your clients'. So you should consult with any experienced person who has lots of experience in this line. Several businessmen consider this as one of their financial options. All the best for your business.