The first step is for you to have a clear understanding of what factoring is and then to understand why it is utilized, the services that are provided and finally the actual interest rate being charged. The basics of factoring are quite simple, a company sells its accounts receivables to a factoring company and the factor advances funds against the invoices and then remits the balance of the money, less fees, when the receivables are paid by the customer. Understanding some of the complexities of factoring however, enables one to better analysis its value.
One of the things you will hear about factoring is how much it can cost. What you need to understand is the fact that you are not paying for interest only; you are receiving valuable services along with your funding.
All receivables sent to a factoring company come under its management. Credit checks on your customers are provided, as well as credit screening for prospective customers is available with your factoring account. This could be considered risk management. Your invoices and payments are posted on an accurate and timely manner, monthly statements are sent to your customers by the factor and late paying customers are brought more in line with that industry's normal pay cycle. For these receivables management services the factor charges a management fee. So the total cost of a factoring are of course the sum of interest and services combined, so mentally combining the receivables management expense to the interest will help you understand that factoring is not as expensive as many think.
Once you have this understanding and apply this to the benefits of a positive cash flow you will truly appreciate how powerful this form of finance is!
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