When payment is not made within the stipulated time, it causes a lot of damage to the business due to lack of fund flow. This is especially true for companies with seasonal business and large cash flow. Such time lag in payment affects the business activities as the payment cycle takes a long time in coming.
The Need for Factoring Companies
When companies make a sale, they sell their product or services and customers purchase them. The customer produces an invoice to the seller promising to pay the given amount in the immediate future. An invoice is an agreement and a promise to pay the sum mentioned in the invoice. When the customers make payment, the sellers uses the cash to further produce goods and to honor his own payments and buy further goods, supplies and materials. He has to pay the salary to his employees. The seller has his own commitments that he has to honor. But when there is a lag in payment of the bill, the seller is affected and he is not able to proceed further in his daily production, purchases and meet his expenses. Hence, companies seek the help of the factor, who stands between the seller and the buyer and gets the amount from the buyer and pays them to the seller and enjoys a small fee for his service.
The Role of Factoring Companies
Factoring Companies play the role of a lender who lends a fixed amount to the seller. The collateral that he gets for lending is the invoice from the seller. The factoring companies get the entire amount mentioned in the invoice from the customer. He plays the role of a lender as the businessmen require cash immediately and cannot go to financial institutions to get the money against the invoice.