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How Does Factoring Work?
A potato
chip company has purchased $100,000 worth of individual
serving bags from Bob's Bag Company. The potato
chip company buys from Bob's partially because Bob
allows 60 days within which to pay for the bags
ordered.
1) Bob ships the bags and issues an
invoice.
2) A factoring agreement has already
been entered into with Bob's Bag Company.
3) Bob
sends the original invoice and shipping and receiving
document to the factor.
4) The factor verifies
shipping, receipt and that there is no merchandise
problems.
5) Within 24-48 hours, Bob gets 70% of
the face amount or $70,000.
6) The factor holds
the balance in a reserve, or escrow account.
7)
When the invoice is paid by the potato chip company, Bob
receives the balance less the
fee.
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Factoring
Enhances Cash Flow:
Consider The Example
Below:
| Without
factoring: |
|
|
| Sales
|
1
million |
100% |
| Cost of
sales |
$600,000 |
60% |
| Gross
profit |
$400,000 |
40% |
| Operating
cost |
$380,000 |
38% |
| Net
profit |
$20,000 |
2% |
| |
|
|
| With
factoring: |
|
|
| Sales |
2 million |
100% |
| Cost of
sales |
1.2 million |
60% |
| Operating
costs |
$600,000 |
30% |
| Operating
profit |
$200,000 |
10% |
| Factoring
expense |
$70,000 |
3.5% |
| Net profit
|
$130,000 |
7% |
|
|
The profit increase
due to increased cash flow is normal because you now are
utilizing your fixed assets more efficiently. Factoring
works because it gives a company immediate cash thereby
increasing the company's ability to purchase additional
materials and labor which allows for increased productivity
with the same capital base.
Factoring also has other
benefits. The factor assumes responsibility for the
collection of invoices. That relieves your accounting
department of credit checks and provides customer follow-up
when an invoice is due. It can mean operational savings
of as much as 2 percent annually. And it allows every
employee in an organization to concentrate on sales and
production.
With factoring, you retain complete
control and ownership of your company ... and you get the cash
you need.
Factoring
Benefits
learn
more about
Please click
"Consumer Contracts"
for information regarding factoring consumer
receivables.
Various Terms Used For Factoring:
Invoice factoring, account
receivable factoring, accounts receivables, receivable
factoring and accounts receivable financing are all
synonymous with factoring
Factoring Medical
Receivables:
Access Funding Center, Inc. also offers a
consulting service for factoring medical
receivables.
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