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A running business sometimes reaches a point where it needs to grow further but lack of cash problems stand in the way of that growth. To solve such problems businessmen usually try many different funding sources or choose to put money of their own. When they do not have the cash they sometimes resign themselves to partner with a third party. In order to avoid that there is a financial alternative for those whose clients pay mostly with credit cards.
This kind of financial alternative is a form of the factoring contract which will be explained later on this article. The main difference between this form of financing and the rest of the factoring contracts is the requirement of credit card payments. There is of course a reason for these requirements that also explains why the fees charged are significantly lower than on the rest of the factoring contract types.
Factoring Explained
The factoring contract basically involves a business and a financial institution that take cares of charging the business’ clients. It is a form of intermediation that implies that the business will receive payment for his products directly from the financial institution instead of the clients thus assuring payment in exchange for a fee that is usually paid in form of a portion of the sales.
This procedure has many benefits for the business: The risk of default from clients is bestowed to the financial institution and thus, the business can show healthy balances all the time. Also, it solves lack of cash problems as the financial institution pays in cash and in advance. The main disadvantage is that it is rather costly compared to other financial options where the business retains the risks involved in collection.
Credit Card Forms Of Factoring
These forms of factoring provide an additional advantage. Since payment is more secure because the one actually paying for the purchase is the bank or credit card issuer, you know that the payer is actually solvent. And only under certain and rare circumstances there is a risk of default. Thus, the financial institution performing the factoring takes a lower risk and thus can charge lower fees for the service.
Collection becomes and easy task because the credit card company pays for the goods and takes care of collecting from its clients. Thus, these forms of factoring are reduced to the cash advance part of the contract. The only service that the factor really provides is the cash provisions in exchange for a small portion of the money collected from the business clients’ purchases.
The only situation where the financial institution can reject a particular transaction and do not provide the funds agreed for it happens when the payment does not take place because the goods are not delivered or are not as promised and thus the client refuses to pay. But if there is a lack of solvency the financial institution will still have to pay because that is exactly one of the main risks that it takes by signing a factoring contract with the small business.
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