Factoring services for small business are means to gain much-required immediate cash and also to tackle the problem of unpaid pending payments. Small businesses do not have the deep pockets and resources and contacts of big corporations and they have to work under certain constraints. The way small businesses handle certain situations is markedly different from procedures followed by big enterprises. Factoring services are a good example for that.
When faced with a pending payment, big corporations usually outsource the work to a third party agency that handles the tasks related to collection like follow-up phone calls, payback plan negotiation etc. In case of big enterprises, the cost of hiring an agency to do this for them is justified because the stakes are higher in big business and there is a good chance that the deal will be big enough and the amount of money involved will be high enough to warrant such a service. Agencies will collect the payments in return for a fixed fee or percentage. But small businesses mostly opt for factoring services.
In factoring a company sells its account receivables to a third party, called the factor. There are three parties involved here – the buyer, the seller and the factor. The small business would be the seller who has sold a product or service to the buyer. The buyer has yet to make the full payment or has defaulted or is trying to buy time while the seller is getting increasingly uncomfortable with the pending liability. Sudden non-availability of funds due to non-payment of dues can derail a company’s plans.