Take advantage of the factoring company and bridge the working capital gap |
Posted: April 28, 2017 |
Business enterprises face the perennial problems of a mismatch in the cash flow. There is always a time lag between the completion of the order and the realization of the proceeds. Market compulsions force them to offer credit to their clients thereby straining their finances further. This affects the free flow of the business. Of course, you have the banks and other financial institutions to bridge in with their working capital and debtor financing schemes. However, the issue of the credit ratings raises its head in between thereby making it difficult for the business with an adverse credit rating to procure bank finance. There is only one option left for them. It is to approach a factoring company such as Interstate Capital. What is the role of the factoring company? How can it help to solve the problems? Let us look into the issues through the medium of this article. The factoring company acts as an intermediate between the seller and the purchaser. After the completion of the order, the seller raises the bills or invoices on the buyer. Sometimes, there might be a credit period of say 60 days. On completion of the credit period, the buyer has to make the payment. Under such circumstances, the buyer accepts the bills agreeing to pay the same on the due date. The factoring company pitches in between and purchases/discounts such accepted bills of exchange. They make the payment of the bills to the seller. They send a notice to the buyer that they have cleared the transaction on behalf of the buyer and that the buyer has to pay the company on the due date. On the due date, the buyer makes the payment to the factoring company thereby completing the transaction. All the parties to the factoring transaction gain from the same. Let us see how they do so. The principal beneficiary is the seller. He gets the payment for the bills immediately on dispatching the goods and acceptance of the bills by the buyer. This leaves him with enough cash to roll it over in his business. There is no locking of funds. The seller might not have a good credit rating. Therefore, banks might be reluctant to finance him. The seller can avail this facility of factoring at rates starting at just 0.49%. Usually, the factoring companies stipulate a margin for each transaction. However, they may finance up to 100% as well depending on the credit rating of the buyer. This is the main difference between an ordinary banking transaction and a factoring transaction. In the normal banking transaction, the banks insist on the credit rating of the seller before financing his bills. In a factoring transaction, the factoring company places greater emphasis on the buyer’s credit rating. They reason out that the buyer has to make the payment in due course. Of course, if the buyer defaults in the payment, the seller has to close out the deal. The buyer benefits as well because he has to make the payment on the due date. In the meanwhile, he can receive the consignment and deal with it accordingly. The freight carriers can also benefit from the deal. In the normal case, the freight carriers do not get the advance payment in full. They have to deliver the goods and then make the claim for payment. This can take some time. In the meanwhile, they have to incur fuel charges, etc. In the factoring arrangement, the factoring company makes the entire freight payment in advance. They have facilities such as seeking fuel advance, etc. The factoring company benefits because they get the interest out of lending the funds for a short period. In case the buyer does not make the payment, the seller has to reimburse the costs incurred. Thus, the factoring companies do not lose anything in the transaction. Setting up the transaction is very easy as well. It does not take more than a couple of minutes for the factoring company to make a decision. However, the factoring companies do their due diligence perfectly to avoid financing sister concerns. The parties to the transaction benefit from the same by this excellent system. This is the beauty of factoring. Hence, it has become very popular in recent times.
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