Factoring of Debtors is a term which is not very common. For those companies and firms who have debts factored with an outsider entity is becoming a common phenomenon. Factoring of Debtors is a great instrument to make money in to your business. This is possible with the help of over draft facilities and other forms of loans. Factoring will assist in making negotiation for getting discounts with the suppliers by early settlement of accounts.
Factoring of Debtors will help to make your business grow. The working of factoring is as given; if there are 3 parties who are directly involved i.e. the parties will be the factor, the debtor and the supplier. In this case the factor will get a reduction for the invoice to a debtor and thereby the factor will give a percentage of the amount which usually will be 80% to the company who then will sell the receivables. The debtor in turn will make payment directly to the factor. All invoices have to be underwritten by the insurance company.
Factoring of Debtors are sometimes recorded which means that the financial institutions are buying the debt and puts the collection on behalf of the company. Company will benefit from the early payment.
Firms usually adopt factoring techniques when the cash balance available with them is not sufficient to meet other cash needs, such as new contracts. The use of factoring is necessary to maintain a cash balance which is smaller. When the firm reduces its cash balance, money available for investment will be increased.
Many businesses have different types of cash flows and it varies time to time also. Sometimes the cash flow may be small and some other times the cash flow may be huge. So when trying to find the proper maintenance of cash flows, factoring is used and utilized. Each business has different dependence on cash flows too.
The term factor firm has lot of importance in case of factoring of debtors. Let us look what a factor firm is. It can be a specialized financial firm inside a banking organization itself. A portion stated in the financial accounts will be received by the trading firm. After a discount of around 20% this value comes around to 80% in many cases. For this kind of a discount an immediate payment is received by the trading firm from the factor firm without considering the collection waiting term. This step becomes crucial in factoring the debtors.