Business Financial Factoring- A Brief Guide on Raising Working Capital

Posted By : Phineas Gray , on Feb, 2015

 

A small business owner has to be very prudent about business finances. Most small businesses make two types of sales: credit sales and cash sales. While every business would prefer to make cash sales, small businesses must offer credit sales as well, since many large companies do not require immediate payment for purchases. Thus, sales on credit generate good income. This income is recorded in a debtors’ account, which is maintained by the company’s accountant. The balance in the debtors’ account indicates the amount of money that the business has yet to receive, making it an asset for the business.

However, delays in cash receipts from credit customers can reduce a business’ working capital. Small businesses, which do not have a lot of financial flexibility, may have to scale back their expansion plans if they continue to record losses in the form of bad debts. Moreover, businesses that receive late payments might forego important expansion opportunities due to the lack of funds. That is why business financial factoring is an excellent option.

What Is Business Financial Factoring?

Business financial factoring services are offered by numerous financing and capital funding companies. Depending upon the nature of the business, financing companies may allow businesses to factor their debtors’ account and receive a percentage of the total balance.

Business financial factoring is an excellent way for a business to increase its cash flow. Many businesses opt to finance their receivables after they hit a certain figure. Companies that offer financing factoring services have a number of requirements, however. For starters, they analyze the credit risk involved in the transaction. For example, if a business has been unable to receive money from its debtors for over a year, it is unlikely that the debtors will pay. Hence, the associated credit risk is much higher. As a result, the funding company might offer a lower percentage of the receivables balance in financing. However, if the debtors have a positive credit history, the offered percentage will be higher.

How to Raise Working Capital with Business Financial Factoring

When a business is unable to realize its receivables for a longer period, their working capital becomes smaller. They cannot make purchases since they aren’t generating any cash from their sales. Hence, the business has to shift its focus from expansion to credit collection. However, factoring provides the perfect outlet in such cases. Instead of waiting two months for a customer to pay, businesses can simply factor their debt and receive 80% to 90% of the balance immediately as cash in hand. This increases the working capital as well as the liquid assets of the business.

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