Every business in the world needs cash and this need is everlasting. Not only business organizations but the not for profit organizations like the charitable institutions also need funds to operate freely and smoothly. Basically speaking cash flow is like grease that keeps the functioning of the whole organization smooth. But when the cash position or the liquidity position of the company comes to a halt or is under poor conditions than a real need of cash arises.
For companies which are growing or has just started growing and which is establishing new customer relationships, a good cash flow situation is important. In this situation generally what happens is that the company has to make prompt or even immediate payments to the clients while it is not receiving immediate payments from its customers. There may be a time gap between the delivery of goods and the realization of money. Or there may be a situation that the credit period offered by the creditors is lower compared to what the company has to offer to its customers.
In this situation there may be a cash flow crunch and here arises the need for account receivables financing. Loans from bank is not a good option as it will again lead to same financial crunch to due optimization of sales in the future. The person is just left with invoices or bills receivables which can be realized only after a certain time period which may range from 15 days to 3 months generally.
These invoices and bills receivables are known as accounts receivables and the factoring companies easily factor them to provide easy cash to the people. In accounts receivables financing, the companies get the bills discounted from factoring companies which are generally banks.
By discounted it is meant that the bill or invoice is given to the bank or the factoring company at a lesser amount than what is realizable on its maturity. This is the fees charged by the factoring company. But it is really helpful as the company is able to realize instant cash without waiting for the whole period of time.
The factoring company gets the payment from the customer on maturity and in case the customer defaults in making such payment, then the whole invoice amount is charged from the company.
Account receivables financing is really successful when the profit amount in the invoice is greater than the discount amount.
For companies which are growing or has just started growing and which is establishing new customer relationships, a good cash flow situation is important. In this situation generally what happens is that the company has to make prompt or even immediate payments to the clients while it is not receiving immediate payments from its customers. There may be a time gap between the delivery of goods and the realization of money. Or there may be a situation that the credit period offered by the creditors is lower compared to what the company has to offer to its customers.
In this situation there may be a cash flow crunch and here arises the need for account receivables financing. Loans from bank is not a good option as it will again lead to same financial crunch to due optimization of sales in the future. The person is just left with invoices or bills receivables which can be realized only after a certain time period which may range from 15 days to 3 months generally.
These invoices and bills receivables are known as accounts receivables and the factoring companies easily factor them to provide easy cash to the people. In accounts receivables financing, the companies get the bills discounted from factoring companies which are generally banks.
By discounted it is meant that the bill or invoice is given to the bank or the factoring company at a lesser amount than what is realizable on its maturity. This is the fees charged by the factoring company. But it is really helpful as the company is able to realize instant cash without waiting for the whole period of time.
The factoring company gets the payment from the customer on maturity and in case the customer defaults in making such payment, then the whole invoice amount is charged from the company.
Account receivables financing is really successful when the profit amount in the invoice is greater than the discount amount.
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