All about debt factoring
Accounts receivable factoring is a process in which you sell your business's outstanding accounts to a factoring service company. While factoring services won't pay you the entire value of the outstanding accounts, they will give you a good portion of the money owed to you, and will save you the time and effort it would take to try and collect on your own.
Some Considerations about Factoring
Factoring services make their money by purchasing your outstanding accounts for a reduced price, and then collecting on them. That means that the amount of money they make is dependent on how successful they are in collecting the money owed. Invoice factoring services are most useful for companies with high accounts-receivable levels that will prove to be difficult to collect, but before a factoring service will purchase your accounts, or determine how much they will pay for the accounts, they will try to determine how easy it will be to collect on unpaid invoices.
Debt factoring is a great resource for both large and small business accounting departments that are having trouble collecting their accounts receivable. However, before you sign on the dotted line, you should consider how much money you're going to lose on your outstanding accounts. Some factoring services expect a significant discount on the purchase of your accounts because they anticipate having difficulties collecting the unpaid funds.
You may also find that the factoring company expects to have some influence over your future sales. If you continue to do business with the customer or client who has fallen behind in their payments, your future sales will that customer or client will involve both your company and the factoring company, since factoring tends to be a long-term, binding sales agreement. However, you probably are not going to want to continue to do business with people or other companies that don't pay their bills, anyway.
How Factoring Can Improve Cash Flow
Factoring is a beneficial service for organizations that need a quick cash-flow increase. It protects companies from bad debts (and the need for other collection services) and shortens the amount of time you spend waiting for outstanding accounts. Although you suffer a loss in the overall amount you receive, reducing the amount owed to you and receiving a good portion of the money owed to you makes up for it.