Factoring accounts receivable is a financial strategy that can help businesses improve their cash flow and manage their working capital efficiently both domestically and abroad.
In this blog post, we will explore the two types of factoring and the benefits it offers to businesses.
Types of Factoring
● With recourse: if a customer fails to pay, the factor sells the invoice back, and the business takes credit risk. However, most customers that factor with recourse purchase credit insurance to mitigate the credit risk. In contrast,
● Without recourse: the factor takes credit risk.
Benefits of Factoring
● Immediate cash flow: Factoring involves selling accounts receivable to a third party (a factor) at a discount, in exchange for quick cash. This can help businesses access the funds they need quickly, without having to wait for customers to pay their invoices.
● Improved liquidity: Factoring can improve a company’s liquidity, allowing them to pay bills, make investments, and grow their business.
● Reduced credit risk: By selling accounts receivable, businesses can transfer the credit risk associated with those invoices to the factor. This can help protect against non-payment and bad debt losses that can impact your credit.
● Outsourced credit and collections: Factoring companies often handle credit checks, collections, and other administrative tasks related to accounts receivable, allowing businesses to focus on other core aspects of their operations and growth.
International factoring
International factoring offers additional benefits for businesses, including:
● Mitigated Foreign Exchange Risk: International factoring can help businesses mitigate the risk of currency fluctuations when selling goods or services to customers in foreign countries.
● Improved Cash Flow: International factoring provides businesses with immediate cash for their export sales, which can help improve their cash flow and working capital position.
● Reduced Credit Risk: International factoring can help protect businesses against non-payment and bad debt losses when exporting to foreign markets.
● Access to Financing: International factoring can also provide businesses with access to financing, such as pre-export and post-export financing, enabling them to expand their international operations.
Overall, domestic, and international factoring can be valuable financial tools for businesses looking to improve their cash flow, manage risk, and grow their operations, both domestically and abroad.
Other key points
● There is an Advance rate of 80% – 90% on eligible receivables.
● Most international receivables will need to be insured with a credit insurance policy.
● This is not considered a loan and will not appear on your balance sheet.
● Single debtor factoring and forfeiting are also available if your business needs them.