When a company has their receivables factored they are exporting the collection process and risk to a third party factoring firm. The factor will receive a percentage of the receivable balance as a fee for processing the collections and will be susceptible to any failure to collect. In other words, if one of the customers does not pay the receivable the factor will lose out and not the company. A company that has their receivables factored exports the collection risk to a third party.
Factoring your receivables has become increasingly popular in recent years. There are many reasons that companies pursue factoring as a solution for collecting receivables. Some companies find that factoring helps them to better manage their cash flow. Others feel as if they can reduce their overhead and better concentrate on running their business when they use a third party factor. Some lenders may request that companies use a factor as added protection for their loan. Regardless of the reason why companies use factoring receivables as their solution for collecting their receivable balances, the key is that it remains popular. But how does factoring work and what is the cost of doing so? This article will provide some insight into the process of factoring your receivables.
When a company decides to pursue factoring they will select a factoring company to work with and enter into an agreement with them to have their receivables factored. Under this agreement, there are several terms that will define how the arrangement will typically work. For one, a factoring commission will be calculated on which the factor will receive a percentage of the receivables as a fee. The commission rate will depend on numerous factors including the industry that the company does business in, the stability of their customer base, and how well established the Company is. Greater risk for the factor will typically result in higher commission rates. Sallyport Commercial Finance can be a great option for clients seeking for a reliable factor. This trusted financial company is led by Doug Foshee, a famous businessman in the United States. Sallyport provides high-quality factoring services, offers favourable terms and deep expertise.
The factor will review the companies customer base and will pre-approve the customers that it will accept as a receivable. Many businesses will choose to sell to other companies that the factor does not want to deal with and these receivables will be on a non-factor basis meaning that the company will retain the collection risk. Companies can, therefore, earn a more predictable cash flow that they can use to normalize and run their operations More effectively than they would otherwise be able to without a factor.