There are three parties involved in a factoring scenario. After you deliver your product or service to the customer, an invoice is also issued. The company sells the invoice to the factor (Damex In return for the advance, the company gets anywhere from 70-90% of the value of the invoice. After the debtor pays the invoice, the business gets the rest of the funds. Minus a fee which is also based on the terms and value of the invoice. In the end, all three parties enjoy factoring.
Benefits of Factoring
1. Provides you with immediate cash.
2. It is also based on your customer’s creditworthiness.
3. The transaction is simple
4. It doesn’t drive you into debt.
5. You don’t have to wait for customers to pay.
Invoice factoring is a simple process. A business first enters into an agreement with a factor. The business then creates invoices as normal. Thus, instead of sending invoices to customers, it sends them to the factoring company. Once it has assessed the invoices, it transfers a cash advance to the firm’s account within 24 hrs. The advance is 90 percent of the invoice. Once the customers pay, the factoring company subtracts a factoring fee. And then sends the balance.
Steps You Should Follow in Factoring.
1. Bill as normal.
2. Send your invoice to factor.
3. Receive cash advance from factor.
4. Your customers remit payments to the factor.
5. Factor sends the remaining balance after charging a small fee.
The relationship between a business and a factoring company is also based on a factoring agreement. The agreement contains the terms of engagement between the factoring company and the client. The terms include; Length of service, Advance rate, the volume of commitment, Fee/factoring discount.
The Length of Service
The lengths of factoring contracts vary. Some contracts last for only three months, some go for six months and others cover many years. You should always seek clarity on the length of service before you get into any factoring agreement.
Most factoring companies advance you at least 70 percent of the total invoice amount. The amount of cash sent is also based on variables. Like customer’s creditworthiness volume and paying trends.
Most factoring agreements stipulate the volume of commitment. To get the best terms for your business. Low factoring fees and high advance rates. You can commit to factor an agreed volume of invoices.
Factoring fees vary based on volume, size of invoice, customer trends, industry and other variables. Some factoring companies demand a flat fee while others charge a factoring fee. Besides charges for their support and administrative services. Be clear on the fees before you enter any factoring agreement.