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All We Must Find Out About Factoring

By Christopher Taylor

The role that factoring companies have is to purchase a financial asset from clients. This means that they will purchase a client’s debtors invoice list. It is not a loan per se as it is not based on the client’s credit worthiness or the value of the company. It is based solely on the value of the client’s accounts receivable book.

Companies sometimes use this method of raising money to re-invest into their business. The money may be needed to improve their manufacturing facilities in order to increase production. This will in turn raise their sales volume and hence their profits. It also stops the financing role they play in carrying the debts of their customers.

When a client approaches a factor to try and sell their accounts receivable book, there are some serious decisions to be made by the factor. They would have to find out if the debtors are credit worthy and able to meet their debt obligations. They can take out insurance to cover them for a loss if the client’s debtor becomes bankrupt and thus not able to settle his debts.

The normal arrangement which is used by many small firms is when the debtor is asked to pay the factor directly. The factor will be responsible for all the collections and the risk of non-payment in cases like insolvencies etc. In a case where there is insolvency etc. The factor cannot request the funds from the selling company. There are two types of factoring. The one is recourse and in this instance the seller is unprotected against bad debts. Under non-recourse, the factor will take on the entire risk of non-payment of the invoice.

Clients will sometimes try to defraud the factor by issuing invoices that are fakes or by doing invoicing for goods that have not yet been delivered. Sometimes the goods have not even been produced yet. They sometimes do not allocate or may misallocate payments that the debtor has made on his account. Credits that should have been given to the debtor may not have been done. The factor will be able to get insurance to cover this type of fraudulent behavior. They can request an audit of the client’s accounting records in order to protect themselves from fraud.

Sometimes the debtors’ amounts will be incorrect because of contractual disputes. There are other disputes that could exist. For example, goods that have been invoiced and not delivered or the debtors have received damaged goods and these issues have not been sorted out.

Often it is an easier method for companies to make use of factoring companies. If your accounting system is in order and all transactions have been correctly entered and allocated, it will make it easier to do this. It may also be simpler than trying to obtain a loan via your bank.

Young, growing companies or those with tax liens – and even bankruptcy – can still qualify for an invoice factoring account. Invoice Factoring At one time or another, every business, even successful ones, have experienced poor cash flow. However, they factor retail business.

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Article Citation
MLA Style Citation:
Taylor, Christopher "All We Must Find Out About Factoring." All We Must Find Out About Factoring. 11 Aug. 2010. uberarticles.com. 17 Feb 2015 <http://uberarticles.com/business/all-you-must-know-on-factoring/>.

APA Style Citation:
Taylor, C (2010, August 11). All We Must Find Out About Factoring. Retrieved February 17, 2015, from http://uberarticles.com/business/all-you-must-know-on-factoring/

Chicago Style Citation:
Taylor, Christopher "All We Must Find Out About Factoring" uberarticles.com. http://uberarticles.com/business/all-you-must-know-on-factoring/


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