Small and medium enterprises can now receive tailored and mostly flexible financial services that they require in times of sophisticated procedural transactions, when faced with issues emerging due to limited resources and mainly constraints related to the cost of operations.
Third party companies have come up with solutions to assist enterprises in dealing with these kind of business threatening difficulties. Enterprises have to consider terms and simplicity of accessing these services in order to make proper and convenient choices, taking the advantages of understandable infrastructure and technology. Some of the financial services offered by third party companies and easily accessible to small and medium enterprises include Accounts Receivable Financing, Purchase Order Financing, Asset based financing, staffing factoring among others.
This is a general kind of financial transaction between an enterprise and a third party financial services provider whereby the entity deals its invoices or any form of receivable to the third party, also known as a factor at an agreed discount rate, when a debtor has not made any payment for a product or service that the enterprise has already delivered. The main aim of this is to enable the enterprise have cash to continue running business activities among other immediate obligations.
In a nut-shell, there are three parties involved: The enterprise, which has offered a product or service at a profit and therefore invoices the client; The factor, who buys the receivable such as the invoiced amount from the enterprise at a discounted rate; The debtor, who has received a product or service from the enterprise making himself liable to a payment that is indicated on the invoice.
Accounts Receivable financing
This kind of financial transaction involves an enterprise that utilizes payments owed by its clients as collateral when indulging in a financial agreement with a third party company, accustomed to offering financing services based on this kind of agreements. However, the agreed amount to be offered to the enterprise depends on several factors such as the age of the payments anticipated by the enterprise, for instance, old receivables reduce the anticipated amount.
The main aim of this transaction is to aid an enterprise to utilize cash that is baffled in the receivables account and also reduce risks by transferring them to the third party company that specializes in managing them. Eventually, the enterprise focuses only on providing services that they are best at.