What Should I Take Into Consideration Before Making A Factoring?

Has it ever frustrated you to miss opportunities in making good business because you are never able to collect from your customers? Does it bother to have good customers and still not being able to pay your suppliers? If you answered positively to any of these questions then you should take a closer look into Accounts Receivable Factoring or AR Factoring.

AR factoring is a financial instrument that allows your company to sell the bills that your customers owe you in concept of accounts receivables at a discount in exchange for a payment. The financial institution will give you money on the basis of your accounts receivables and they would manage your portfolio for you.

You may be wondering how is it that AR factoring really works? Let us take a look at an example. Let us assume that you have a list of customers that have not paid you after the 90-day period you give. If you want to use this mechanism you need to approach an AR factoring firm and bring your bills. An factoring agent, or factor, will review your case and analyzes the likelihood of your customer to pay and your bottom line.

Once this analysis is performed, they will indicate which the discount rate to apply to your bills is. If the business is convenient for you, they should deliver their papers accepted at the financial institution and later it will deposit to your bank account the amount agreed. The financial institution will pay the customer to submit the bill.

What is the objective of the AR factoring or accounts receivable factoring? Factoring aims to reduce billing cycles and thereby provide liquidity to the company. The key benefit is having the money faster, and it is very useful when you have opportunities for business which requires giving many turns to your financial cycle. For example, let us suppose you are an importer of the most successful video game console and Christmas is coming. Surely you would be interested to have the cash to pay your supplier, who does not give you credit. You will then buy a large quantity of video game consoles and enter into AR factoring and quickly recover the money to pay your supplier and buy more consoles.

AR factoring is a legal and widely accepted tool. However, you need to be aware of the cost that it implies to your business. We suggest that if you decide to use factoring, you can transfer the costs to your customers down to a certain percentage without over charging them too much.