A Summary Of Information Regarding Business Factoring
Posted October 9, 2010 – 6:41 am in: LoansBusiness factoring is a process whereby a business sells its assets to a third party. The company sells its invoice due assets for a discounted fee in order to provide itself with immediate funds. This then enables the business to continue trading. This process differs from obtaining a bank loan for three main reasons. A view of the firms credit history is not required and the deal is determined solely by the value of the asset in question. The next is that instead of a loan, the process is the sale of a financial asset that the company holds. Lastly, a bank loan involves two parties, the bank and the client, whereas factoring involves three parties the client, the client’s client and the third party buying the asset.
The difference between factoring and forfaiting, although similar, is that in factoring all of the company’s receivables are sold whereas in forfaiting only one is sold. Factoring is also a commonly misused term in the sense that it is used when a discounting invoice practice is used, this practice involves loaning money by borrowing against the value of the asset.
As mentioned there are three parties that are directly involved within factoring; the seller of the receivable, the debtor, the one who owes the receivable and the factor. The receivable is a financial asset usually connected with the debtor’s liability to pay the amount owed to the seller. This is generally a payment or a service received or a product purchased. The seller of the receivable then sells this financial asset to the third party, the factor, at a discounted rate to obtain cash immediately. This transaction effectively passes the ownership of receivable to the factor, including all of the rights and potential losses that are associated with that asset.
Therefore, the factor has the right to receive all payments made by the debtor in lieu of the asset. If the debtor is unable to pay the amount the losses incurred from the asset, such loss shall be born by the third party. The debtor is generally informed of the sale of the asset and from the point of sale, the third party assumes all responsibility for billing and collection of the debt from the debtor.
When the financial asset has been purchased by a third company and if the original seller obtains or receives payment from the debtor, then the seller could incur increased risks from the factor. The factor may not advance them any more money for receiving money on the factor’s asset.
There are generally three main parts to a transaction involving business factoring. The advance, which is a partial payment that is made to the seller after the agreement of terms of the deal which represents a small percentage of the asset.
The second part is the reserve. This totals the remainder of the asset which is held until the payment of the asset is made by the debtor.
The last is the fee. This relates to the costs associated with arranging the transaction. These costs are deducted from the reserve prior to the debt being repaid back to the seller.
Within the practice of business factoring, most third parties will charge the seller a service charge or administration charge to cover the transfer of the asset to the third party. The third party may also charge the seller interest on the asset if the debtor fails to pay the asset on time.
Business factoring is a process whereby a business sells its assets to a third party such, assets for example invoices, for a discounted fee in order to provide itself with immediate funds. We’ve got the inside info on factoring companies and factoring business .
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