Feed: Invoice Factoring Consists Of A Firm Offering Its Debtors For - AggScore: 14.0

Invoice Factoring Consists Of A Firm Offering Its Debtors For Fast Transaction But For Much Less

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Invoice factoring is a form of short term, working capital financing focused on invoice factoring [1]. It is a transaction where a trading firm sells its outstanding invoices to a third party, at a discount to their book value, in return for immediate cash payment. This financing technique is also referred to as receivables factoring and invoice discounting. Immediate payment improves its cash flow and decreases the risk it incurs of debtors not paying their outstanding invoice. This type of transaction forms one of a broad range of funding techniques often called debtor finance services. The factor firm is a specialist finance firm or a business unit within a large banking organization. The trading firm receives only a fraction of the accounts receivable value as stated in the financial accounts. Indicatively, this proportion may fall somewhere between 60-90 percent with the discount factor being 10-40 percent. As compensation for this discount, the trading firm receives immediate payment from the debtor in possession [2] without waiting the collection period.Invoice discounting transactions provide businesses with several advantages. First, it provides immediate cash flow to fund further sales while offering continuing to offer customers extended payment terms. Second, it allows the business to capture early payment discounts and preferred customer status with its own suppliers. Third, it helps the business be nimble and respond more rapidly to market opportunities.The three parties involved in a factoring transaction are the trading business that sells its invoices, the debtors to that business and the factor firm. The sale of the receivables balance, essentially involves the transfer of ownership of that asset. In other words, the factor acquires all of the rights associated with those receivables, as well as the attendant risks.The factor firm obtains the right to receive the outstanding amounts to be paid by debtors. The factor firm must also incurs the risk of loss if debtors default on those payments. As part of the factoring transaction, the account debtor is notified of the transaction in writing. The factor firm completes all collections from outstanding debtors.The factoring market is well-supplied with financiers and businesses normally do not have difficulty teaming up with a suitable financing partner. Some of the larger factor firms may set a minimum size limit for customers. For instance, major corporate banks such as HSBC may have a yearly sales limit of USdollarsignr10 million. If so, businesses with annual revenue below that level limit would be too small to have a cost effective relationship with HSBC on factoring transactions.Businesses may still be able to attract a factor firm even if some of its sales are exports which refers to a business with overseas-based customers. The viability of this flexibility obviously is greatest if the factor firm has a global footprint. Banking giants like Citigroup and HSBC fit this bill.Businesses wanting to discount their invoice factoring (invoices) through invoice factoring will be required by the invoice factoring financier to provide details of their debtor in possession [3]. These details include standard items like trading name, contact address, the scope and nature of business activities, credit limit, and credit history. The financier will also require a detailed aged receivables schedule. This data will be analyzed by the factor firm to form a view regarding the default risk (credit worthiness) of each individual customer. [1] http://www.hypercup.org/invoice-factoring-involves-a-firm-selling-its-debtors-for-immediate-payment-but-at-a-discount-7007/ [2] http://www.squidoo.com/invoice-factoring-firms [3] http://www.greenfieldcredit.com/