Business factoring is a type of financial service where a firm sells or transfers its accounts receivable to a factoring company, which then becomes the principal and not an agent.
A bank loan refers to money given to a party by the bank. When we speak of factoring, it is a transaction between you, the party who owes you money and the factor. When a bank gives a loan they take in to account the credit worthiness of the business and then release a loan. In factoring, the credit worth of the company has no importance. What is of importance is that how much account receivables have to be recovered. Factoring is buying an asset and a loan is taking a debt.
A factoring alliance is between a group of two to three sponsors who come together to fund a business. The members are generally specialized in different fields of business and when they come together they offer the various specializations under one umbrella. They are like a one-stop- shop who can cater to varied demands of a business.
The biggest advantage of factoring is that it can offer money in bulk. This can be very handy as it increases the cash in hand. This is very useful for those businesses that work with small working capital. Factoring has lately come up as a very profitable business as the factor is buying an asset and not a liability. A number of players in the market have made the rates very competitive.
Factoring can be a very useful tool for any business because it is similar to outsourcing. By paying a marginal discount, the entire gamuts of activities that go in recovering money are taken off your head. This way you can divert more time to the issues in your business that need your personal attention.
Factoring may seem to be a very lucrative option, but adequate care needs to be taken as it has its share of negative aspects too. Firstly when you take in a factor it shows as a debt in your borrowings, thus reducing your credit worth. Secondly, when you take a factor it is at a discount from the actual accounts receivables, so it is a direct dip in your profit.
Also, ending a relationship with a factor may be cumbersome, if there are still customers who have not paid yet. There may also be some customers who would prefer to deal directly with you and not with a factor. Such objections etc have to be handled with lot of care and caution as managing customer relations can be a very precarious situation. There may also be some customers who show an inclination to migrate towards the factor in turn. Adequate caution has to be taken to keep the reins in your hands.
Moreover, your organization culture and the factors organization culture need not necessarily match. When dealing with your customers they have to keep in mind that they are dealing with your customers and any clash of cultures may upset your customers as they take the factor to be your representative. Therefore, although business factoring is a very lucrative business option, take one keeping in mind all the pros and cons. If you do decide to take a factor, be proactive enough to never let the reins of the business go from your hand. At the end of the day it is your business and not the factors.
When it comes to learning information about factoring companies, you need to refer using the web as the number one source. The factoring business can be a perfect income and way to run the companies production.
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MLA Style Citation:
Bennington, Jack "Business Factoring Is Truly An Edge For Business Owners." Business Factoring Is Truly An Edge For Business Owners. 23 Jun. 2010. uberarticles.com. 15 Aug 2015 <http://uberarticles.com/finance/loans/business-factoring-is-truly-an-edge-for-business-owners/>.
APA Style Citation:
Bennington, J (2010, June 23). Business Factoring Is Truly An Edge For Business Owners. Retrieved August 15, 2015, from http://uberarticles.com/finance/loans/business-factoring-is-truly-an-edge-for-business-owners/
Chicago Style Citation:
Bennington, Jack "Business Factoring Is Truly An Edge For Business Owners" uberarticles.com. http://uberarticles.com/finance/loans/business-factoring-is-truly-an-edge-for-business-owners/
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