Building capital is no easy task, especially when a long wait for invoices to be paid becomes commonplace. As factoring becomes a better alternative to tedious bank loans, more and more people are seeing the benefits of the quick and easy process. While it is an easy foray into gaining the capital you need to thrive in business, it is helpful to understand the process and the key players involved.
There is a smooth cycle that goes into factoring and makes it easy to manage. In factoring, there are three major roles that need to be understood.
The Seller is the person in need of capital. That means the actual business owner who is selling their invoices. Since most of the scrutiny involved in factoring will be placed on the Debtor and not the Seller, there isn’t a need for spotless credit. Brand new businesses can qualify for factoring as long as they have solid clients with a history of good financial decisions. A Seller is usually someone who needs a boost in cash flow for a number of reasons and is in need of it quickly. There are a variety of industries and professionals who decide to sell their accounts receivable.
When a Seller decides to move forward with factoring, they contact a Factor. They start the process by sending an invoice to the Account Debtor and making it payable to the Factor they’ve contacted.
The Debtor in this case would be the client whose invoice is being sold. It’s important that the Debtor be reputable; it will be their information that is observed in the factoring process. The Debtor will be researched to assure they are in good financial standing, are creditworthy, and can pay back the capital in question. Since the collections will be geared toward them, debtors are the most important part of the process.
Once a debtor is approved, the Factor will wire the agreed upon funds to the Seller’s bank account. When the client pays out, they send the money straight to the Factor.
The Factor is the company that buys the accounts receivable from the client. The whole of the process will be handled by the Factor, including collection from the Debtor. Once the Factor has collected the money owed from the Debtor, the remaining portion of the Reserve Amount is sent to the Seller, minus the Factor’s fee.
Factoring is simple and easy, but understanding the key players and their roles can help in the decision-making process. As with anything, it’s important to be informed before you make a decision. Factoring provides businesses with much needed capital without a detrimental wait, invasive qualifications, or annoying red tape.
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