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Factoring Information Although
factoring deals exclusively with business-to-business transactions, a large
percentage of the retail business uses a factoring principal. MasterCard, Visa,
and American Express all use a form of factoring in their retail transactions.
Using the purest definition of the word, these large consumer finance companies
are really just large factors of consumer paper. Think
about it: You make a purchase at a store and charge it to your MasterCard. The
store gets paid almost immediately, even though you do not make payment until
you are ready. For this service, the credit card company charges the store a fee
(typical fees range from two to four percent of the sale). The
Benefits Invoice Factoring
can offer many benefits to cash-hungry companies. Rather than wait 30, 60, 90
days or longer for payment on a product or service that has already been
delivered, a business can factor (sell) its receivables for cash at a small
discount off the amount of the invoice. Payroll,
marketing efforts, and working capital are just a few of the business needs
that can be met with this instant cash. Factoring
provides the means for a manufacturer to replenish inventory and make more
products to sell: There is no longer a need to wait for earlier sales to be
paid. Factoring is not just a cash management tool for manufacturers: Almost
any type of business can benefit from factoring. Generally,
a business that extends credit will have 10 to 20 percent of its annual sales
tied up in accounts receivable at any given time. Think for a moment about how
much money is tied up in 60 days’ worth of invoices: You cannot pay the power
bill or this week's payroll with a customer's invoice, but you can sell that
invoice for the cash to meet those obligations. Factoring
is a fast and easy process. The factor buys the invoice at a discount, usually
a few percentage points less than the face value of the invoice. The
Drawbacks People
consider the discount a small cost of doing business. A four-percent discount
for a 30-day invoice is common. Compared with the problem of not having cash
when you need it to operate, the four-percent discount is negligible. Look at
the factor's discount as though your business had offered the customer a
discount for paying cash. It works out the same. Companies
consider the discount the same way they treat a sales price: It is simply the
cost of generating cash flow, much like discounting merchandise is the cost of
generating sales. Factoring
is a cash flow tool used by a variety of businesses, not just those who are
small or struggling. Many companies factor to reduce the overhead of their own
accounting department. Others use factoring to generate cash, which can be used
to expand marketing efforts and increase production.
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A Breakthrough Factoring Company |