Why You Need to Know the Factoring Arrangement Definition

Understanding the factoring arrangement definition is crucial for a start-up business that is barely getting their feet off the ground. In the most basic sense of the word, factoring arrangement is all about securing funds by releasing your invoices or accounts receivables to a lender or finance provider , here referred to as the factor, who will then buy your invoices for a discounted amount. You normally can get anywhere from 80% to 95% depending on the arrangement upfront.


Say for example you just got into a deal with a new client and they have issued your invoice of $100,000 which is to be paid in 60 days. The only problem is that you have to wait 60 days before you get that amount. This relates to 60 days where you have no funds to handle payroll and production costs. Handling the job you will be paid for becomes a burden. This changes when you approach a factoring arrangement.


Here's an example of a factoring arrangement definition in action, specifically for this example. The factoring company could purchase your invoice for 85%, which translates to $85,000. You will receive the $85,000 in two to three business days. There's a cost to using a factoring service but just think about it: you will get your much-needed funds early. You now have $85,000 to start production on the job. Now you can cover the bills and payroll and other expenses you normally wouldn't be able to cover until your client paid you 60 days later. There are a lot of benefits to this option.


The most obvious benefit of course is that you get immediate remedies to stabilize cash flow. Another benefit is that you don't have to stall production or take out immensely large credit or loans to cover your costs. You also have to remember that factoring is a lot easier and a lot faster when compared to taking out a loan from a bank: a bank might deny you the request and even if they approve, it could take a good two weeks before they deposit the amount. When you go for factoring arrangements you normally get the amount within 48 to 72 business hours after the request has been approved.


There are several types of factoring arrangements that you have to be aware of. First there is recourse arrangement and then there are non-recourse arrangements. Recourse arrangements are those where you, the company, will be responsible for any debts in case the client does not pay the invoice. Non-recourse is where the amount is 100% protected and the burden of the debts will be covered by the factor company. One important note to keep in mind when tackling the factoring arrangement definition is to ensure that you understand the basic difference of factoring from invoice discounting.


When you factor invoices, the client is aware of the factoring company working with you. When you go for invoice discounting, the agreement is disclosed and this means your company will be responsible for ledgers, transactions, and collection responsibilities. Get more information by visiting the http://architecturevbn.blogspot.com.

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