If cash flows may fall dramatically, the entity will find that it needs large amounts of liquidity, either from existing liquidity or from a factor to cover its liabilities during this period. Similarly, the longer a relatively small cash flow can last, the more cash is required from another source (cash assets or a factor) to cover its liabilities during this period. As mentioned above, the company must balance the opportunity costs associated with the loss of a return on money that invests otherwise with the co-cost costs associated with the use of factoring. The health sector is a special case where factoring is urgently needed due to long payment cycles from government, private insurance and other third-party payers, but is difficult due to hipaa requirements. This is why medical debt practice companies have developed specifically for this niche. The distinction between assigning responsibility for the performance of the work and allocating funds to the postman is essential to the client`s or debtor`s processes. Companies have made purchases from a supplier for a reason and therefore insist that the company meet the work obligation. Once the work is done, however, it is a matter of indifference as to who is paid. General Electric, for example, must follow clear processes that distinguish between its work and payment sensitivity. [Citation required] Contracts directly with the U.S.
government require a transfer of debt, which is an amendment to the contract that allows third parties to be paid (factors). Factors generally calculate a tax called a discount rate in the range of 0.5 to 5 per cent of the value charged per month. The discount rate is calculated on a weekly or monthly basis, so the longer your customer has to pay, the higher the total cost of factoring. Some companies find it useful to translate the factor reduction rate into an annual percentage that you can easily do with an online APR calculator. Overall, factoring rates are significantly higher than the interest rate you would get for a conventional loan – 28-60% RPA for borrowing, compared to 7% for long-term financing. However, the RPA cannot tell the whole story. Because you borrow money for such a short period of time, the actual cost of credit can be relatively low. The factoring process can be divided into two parts: the creation of the first account and the current financing. Setting up a factoring account usually takes one to two weeks and includes submitting an application, a client list, a report on aging debtors and an example of calculation. The approval process includes detailed support during which the factoring company can request additional documents, such as. B constitution documents, financial data and bank statements.