Many companies find it difficult to achieve financial equilibrium, so they resort to cash flow factoring mechanisms to continue their operations without getting into debt. Next, we clarify the main doubts about this exciting topic so that you can analyze whether or not it is convenient for you to implement it in your business:
What is it?
Cash flow factoring is a transaction derived from a contract. A company sells its invoices or accounts receivable to a factoring organization, aiming that the issuing company can receive the cash more quickly than it would if it were to make the collection itself. Cash flow factoring can be in local or foreign currency, depending on the currency in which the invoices have been issued.
Who participates in a cash flow factoring arrangement?
- The assignor, which can be a company or an individual, who sells its accounts receivable or invoices from its business activity to a financial organization through a service contract
- The buyer can be a company or individual who received a good or service from the assignor and has to pay what was purchased at maturity
- The financial organization or factoring company, which buys the accounts receivable from the assignor
What are the functions of cash flow factoring companies?
- Assume the credit risk
- Assume the exchange risk, if the invoice is in foreign currency
- To carry out collection management.
What are the benefits of cash flow factoring companies?
Generally, the financial organizations or factoring companies charge the company that assigns its rights on the credits, a commission, or an updated interest rate.
Why should you use financial factoring in your business?
There are several advantages to using factoring in your business. Here are some of them:
- Cash flow factoring is a good option if your company needs immediate liquidity because it works as short-term financing, by which you advance the collection of unpaid bills. Most factoring companies buy your invoices and give you a cash advance within 24 to 48 hours.
- You guarantee the collection of all your invoices and avoid costs, time, and effort of collection. Since you are selling an asset, factoring does not become a debt for your company.
- Nor does it take away your ability to turn to other sources of financing.
- It makes your company’s accounting easier because instead of dealing with several clients, you only deal with the factoring company.
- The financial organization or factoring company reserves the right to accept your clients’ invoices. It makes an analysis of your accounts receivable and sees the quality of the debtor, the stipulated term, the amount, and the possibility of collecting the invoice. Therefore, the last word on the assignment of an account receivable is with the financial firm.
Given the little access that small and medium enterprises have to bank loans or the high fees they must pay when accessing one of these, financial factoring is alternative financing.