While running a business, there might arise the need for immediate cash flows for managing working capital finances like paying utility bills or dues, etc. There can be a situation where the seller has sold the goods on credit to the buyer. And the buyer promises to pay the money after a specified credit period. In such a case the buyer’s money gets locked in for a particular period. So, he is in the lack of funds to proceed with further orders. To avoid this crunch, there is a financial instrument available in the market where sellers can raise finance using these account receivable which is called Factoring Funding.
What exactly is Factoring Funding?
Factoring Funding is the financial instrument or debtor finance. In this the seller sells its accounts receivable to a third party called ‘factor’ at a discount. There are three parties involved in such a transaction. A seller, A buyer and A factoring company. In simple words, it is selling unpaid invoices for the requirement of instant cash. This helps the company in their short-term cash needs and manages money immediately.
The factoring company pays 80-90% of the invoice amount immediately. Thus, it solves the problem of working capital. The remaining amount is kept unpaid by the factoring company. It is depending upon the credit worthiness of the customer or the risk involved in the transaction. That is paid after deducting the discount. The factoring company is more concerned about the credibility of the debtor than the customer as he is the person who will pay money at maturity. Factoring is availed to domestic as well as international customers.
What is factoring? How to avail of factoring services?
Benefits of Factoring:
1. Instant access to cash flow
The factoring process is quick as compared to loans which may take a longer time to disburse the funds. So, it arranges the funds easily to the borrower. It solves the issue of a cash crunch.
2. Continuation in the business cycle
Due to the availability of factoring services, the working capital issues resolved and the business cycle continues.
3. Cash-flow without debt
Since the factoring funding is not a loan, hence it does not add liabilities to the balance sheet of a company. So, It ultimately reduces the burden of debt. It is simply selling a company’s assets to a factoring company for immediate cash.
4. Flexible terms
There are no long terms of repayment period like loans in factoring. The tenure depends upon the credit period of unpaid invoices sold by the company.
5. Easy process
The overall process in factoring funding is easy. The documentation is also hassle-free. So, one can avail the cash in barely one or two days.
6. No collateral
Disadvantages of Factoring:
Generally, the costs of factoring findings are high as compared to other funding options. Fees or charges depend upon the tenure of the factoring. But we at Terkar Capital, arrange a reasonable cost of borrowing to our customers.
2. Lack of confidentiality
The customer has to inform his client about the procedure of factoring. There is a lack of confidentiality in the process.
3. Approval based on the credibility of the debtor
The factoring companies payment criteria depend upon the risk involved in the transactions. Lower the risk, the higher will be the chances of qualifying for the factoring procedure. The factoring company verifies the creditworthiness of the debtor, as he will be the person responsible for payment at maturity. Hence, the debtor should possess good credit in repayment.
Types of Factoring
I. Recourse Factoring:
Recourse factoring is a method where a seller sells its invoices to a factoring company. In case of non-payment of an invoice, the seller holds the obligation and has to repay the same on behalf of his debtor.
II. Non-recourse Factoring:
In non-recourse, it is just the opposite. The seller holds no obligation in case of default in payment by the debtor.
Understand the execution Factoring funding from case study.
FAQs on Factoring
1. What is the tenure in factoring?
The tenure in factoring is lesser as compared to other funds. The tenure in factoring is totally dependent upon the credit period of the transactions. The period is for 30/60/90 days, etc as per the requirement of the customer.
2. Does factoring help International Clients?
Yes, there are no geographical limits for factoring. In fact, it will give more benefits to International Customers as one will get exposure to LIBOR plus Spread.
3. What is the eligibility criteria for Factoring?
Note- The eligibility criteria varies as per the geographical limits and the requirements of factoring companies. Below are a few of the criteria:
1. Customers should have unpaid invoices to factor upon.
2. The customer and his debtor should have a good track record.
3. The customer’s company should have specified annual turnover, as per the requirement of the lending institution.
How factoring companies work?
Here is the process of how factoring companies
Why Terkar Capital?
We are among the top 10 factoring companies in India. In factoring, Terkar Capital understands the customer need and checks the feasibility of how well factoring can suit your business. We try harder to find the most suitable product for your businesses. Also, execute the whole process smoothly. Our team of experts and high professional standards makes us different from others. So, whenever it is raising finances, it is Terkar Capital. Apply now.