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Accounts receivable factoring can give companies a shot in the arm by providing much-needed capital. The purpose of this article is to explain how factoring process works and what types of business conditions for this type of financing.
product or service must be completed and approved by the customer
goods or services invoiced must be received in good order completed for customers without a chance of netting. Progress billings not usually figure. In other words, companies can not get cash advances on a contract that is not yet completed. If it is part of the agreement that has been accepted as complete by the customer, the account can be a factor. For example, a manufacturing agreement with a customer to produce 5,000 units per year. In the first month, production of a ship and invoice 500 units of the product to customers. Assuming that the products are considered acceptable on the invoice may be a factor. However, let’s say a construction company has a contract with the municipality to build a water tower. Confirmation of the final product will not be until all the components of the water tower is completely set up and operated. This would not be a situation where factoring could be employed.
Factoring clients have creditworthy customers
Change is extremely important in the invoice factoring relationship is the financial situation of the debtor client. Like any funding source, are factoring companies more sensitive than normal levels of risk. When a factor advances 80% of the invoice amount to the client, they must be reasonably confident that they will add the funds by the customer pays the bill in a timely manner. Factoring companies investigate the credit history of the debtor, which allows them to set limits on the amount of the amount they want to go. The whole combination of solvency customer customer impact outside the advance rate as well as the fees that will be charged. One advantage to account factors more services provided. One of them is credit screening, which helps customers choose the right customers to deal with.
Accounts calculated will be connected to another company
Invoice Factoring is defined as the sale of the company’s accounts receivable at a discount for immediate cash. The receivables are from another company, not an individual. For example, a retail clothing store would not be a candidate for the aspects where they sell to individuals.
Payments must be received within 90 days
Receivables factoring is evaluated on the idea that A / R is short term in nature. Most factoring companies expect payments received within 90 days. If an account goes unpaid long term, they usually expect customers to either pay back the advance they received, or provide existing account to replace the unpaid amount.
Factoring helps companies accelerate cash flow and provides working capital for growth and stability. It is important for the client to understand the various components of what is expected from a factoring company in the beginning of a relationship.
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