What Is a Factoring Company Account?
Companies can sell their accounts receivable to a third party to get instant cash for maintaining their cash flow. The party that buys accounts receivables and pays the company a defined part of the receivables is called factoring company. If you are in business or working for a company it is imperative for you to understand what is a factoring company account.
On selling its receivables, the company gets funds spontaneously, without having to wait for their customers to pay their bills. The bills then are under control of factoring company. When the bills are paid, the amount so received is deposited in an account that the factoring company can access to withdraw funds. Most factoring companies would pay 75-85% of face value of the invoice.
An account that a business establishes with a factoring company remains effective as long as the business requires inflow of funds. Undoubtedly, factoring is costly, but it enables the business to access cash necessarily needed for maintaining its cash flow. But for factoring facility, many businesses would have closed shops. Instantaneous cash flow enables businesses to pay their vendors, prepare payrolls and purchase raw materials or other goods needed for successfully carrying business operations.
Credit for timely Payments
It is quite usual for factoring companies to give incentive in the form of reduced fee to its clients if the bills are paid quickly. When the customer follows the stipulated terms of payment, like paying bills in thirty days, the company gets paid bonus from the factoring company for having received payment in time. Here’s an illustration. Let’s assume that a factoring company paid eighty percent of the amount of receivables upfront. If the buyer pays the bill early, the factoring company would offer a rebate of five percent to its client. So, in fact, the company got paid 85% of the receivables against that account.
Factoring is practiced by many businesses. It is quite widespread in lorry industry, which a highly cash consuming business. This business is rather unstable due repairs, fuel, tires and salary of drivers and regular upgrading of equipments. This business has very low profit margin. Inadequate cash flow could prove to be disastrous for this business. Factoring business in this case works on a continuous basis. Receivables are sold every day and funds are regularly deposited in account, thus maintaining cash flow. A number of industries such as manufacturing, construction and distribution use factoring as a way of financing.
There is another kind of factoring account created for bad debts. Companies offering factoring may charge a part of a bad debt to its business. Generally, the contract includes this clause. Debt that remains unpaid for over 120 days is likely to be included as limited charge-back. Businesses that make use of the services of factoring companies should be very mindful of the credit they may extend to their clients. It’s not difficult to understand that bad customers’ accounts can spoil the relationships with the factoring company. If the buyers of any company go beyond the defined time limit for settling their bills, the company providing factoring facility may refuse to provide any more services to the company.
Hopefully, it helped understanding what is a factoring company account.