Getting back your money stuck in the accounts receivable section of your financial statements is not an easy job. It gets so complicated that some companies decide to have another company do that job for them.
Accounts Receivable Factoring is a method of financing which is less costly and that reduces the risk of non-fulfillment. Provides many benefits that stem from the costs that the company saves by not handling their own credit operations. There is no cost of collection to Accounts Receivable Factoring, since there is an agent to collect the accounts, no cost of credit department, as accounts and wages, the company can avoid the risk of default if it decides to sell the accounts without responsibility, although this is generally more expensive, and can mobilize resources quickly and practically without any delay cost.
Some of the services that customers of Accounts Receivable Factoring products receive are: management of accounts receivables, financing, collection of accounts receivables, and accounting and data collection throughout the process. Companies in charge of Accounts Receivable Factoring will also offer credit risk assessment of your customers and establish credit lines for them. They would also be responsible for transferring the funds coming from the collection process.
All funding sources have both advantages and disadvantages; Accounts Receivable Factoring is no different. On the one hand, it represent a lower cost to the company hiring factoring services than taking care of that themselves. In order to have a collection department up and running you need to pay wages and hire people.
Some of the disadvantages of Accounts Receivable Factoring are: There is a charge for a commission given to the agent and there is always the possibility of legal action for breaking the contract.
If you have not understood how Accounts Receivable Factoring work let us clarify it. When a company is overburden by accounts receivables and sells them to a company (a factor), this company will become responsible for their collecting and giving the company its money back.
The factor will request the money from the customers whose information you have previously provided. The factoring company would then substitute the work a collection department does. When the factor receives the payment, the company will keep a percentage and give you the rest. If they fail to do so, they company would pay the uncollected amounts.