This is a transaction which involves a third party financial company [factor] where invoices, receivables are sold to it by the original company. The factoring company proceeds with the collection of payment on the invoices from the customers. This allows the business company to get their cash quickly to continue running the business. In many situations, the period agreed between the enterprise and the client is one to two months, which is an extended period if the business cash flow is not sufficient. This can lead to delay for the salary payment to the company employees leading to incompetence in delivering the services.
Account receivable financing
This is asset financing preparation where a business company, uses their money owned by the customers [receivables] as a security to enter into an agreement with a financial institution to borrow a loan. The factoring company which is the lender gives the business company a loan which amount is lower than the value of the receivables. The business company also transfers the risk of defaulting by the customer to the financing institution. The factoring company later collects the debts from the customer deducts the factoring fee and give the remainder to the original company. In most scenarios account receivables belonging to the large corporation have more value than the one from an individual or a new business. The easiness of collecting the debt from the customer determines the amount of money to be given to the original company. This financial service helps business to access instant loan to continue running their business without the interference of customers debt.
In every business, finances are the foundation of all operations involved. For the company to continue running and delivering goods and services the cash flow must be stable. When the company faces has challenges of insufficient funds there are financial services which are available to rescue. In modern days, many financial institutions offer instant loans to the business with minimal conditions. This helps to maintain the companies with financial constraints to continue running their businesses. Inventors of mobile banking which offers instant loans by use of the cell phones have positively impacted many small businesses.