Factoring is a financial transaction where a business sells receivable accounts in the form of invoices which is payable within the period agreed at a discount. This type of operation is shown in a balance sheet as an asset. The customer orders various goods from the provider which is listed on an invoice where terms and condition for payment are listed too. Business owners’ uses ledger books for safe record keeping and the balancing of the regular payments and recording the arrears. There is a collection and cashiering team which collects and balances the assessment on behalf of the lender company.
In this era of modern technology, record keeping has been easy where all files are in an accounting software which is programmed to balance all additions using a computer. In a unique case, companies can use the receivable account to borrow a loan from a bank.
Account receivable finances This is a type of asset financing transactions, where the factoring company uses its outstanding receivables which are still owned by customers to borrow money from an investment company like banks.
In the invoices there is a clear record of the value of money which is yet to be paid by the client, the company gives out the original invoice to the bank as collateral, and they are given a loan which is slightly below the actual amount in the bill. In this transaction, the company default risk which may arise after the failure of the client not paying the goods as agreed is given to the financing company. Account receivables vary in their values according to ease of collecting the bill from the customer. Large corporation accounts’ receivable have more value when accessing a loan than the one owned by an individual or a small company. Account receivable finances allow the factoring company to access instant loan from a bank and allows its activities to run as usual without being affected by uncollected bills. This kind of transaction helps most businesses to get goods even if they don’t have to pay it in cash. Mostly, this service is to the regular customers who have no record of defaulting payments. Big corporations like electricity providers allow their customers to use the power and pay afterward mostly on a monthly basis.