Factoring Company Case Study

Factors
Aenashaa Amit Safii
LIM College

Factors
Factoring is a financing activity in which the company’s owner sells his invoices, or accounts receivable, to a third-party company to raise capital. Factors help companies by providing capital for its operational activities. A company can use this money in order to pay their employees, handle consumers and other business-related activities. Factoring is seen in small to medium sized companies who require immediate cash to operate their business activities. Factoring is commonly seen in companies whose bank loans are rejected and do not have enough capital to start up. In a basic factoring arrangement, once the company generates an invoice, it is forwarded to a factoring firm who then pays the company about 85%-90% of the invoice total to the company as an advance. As soon as the client pays the factors, the balance is sent back to the company minus the factoring fee. This way, factoring companies provide instant cash instead of the companies having to wait for the customers to pay them for their goods or services. As the client directly pays the factors, factoring company

Sometimes, companies might generate fake invoices and provide them to the factors. This might result in fraud and loss of money and credibility. Also, if the client is unable to pay for the invoice, the company will have to repay the money back to the factoring firm plus a factoring fee as well. If it’s a small invoice, a company will be able to manage it, however, if it’s a big invoice, the company might end up owing more than it owed in the first place. Therefore, a company should always handover only those invoices, whose clients have a good credit history. This will not only give the company a good factoring rate, but also the company won’t incur more