Factoring Has Been Used by Businesses For More Than Four Centuries
In the world of finance, factoring is a transaction in which a business sells its accounts receivable to a third party — called a “ factor” — in return for immediate cash.
With the assistance of a factoring company, businesses sell or borrow against their outstanding commercial accounts receivable. The cost is a fee often referred to as a discount — typically between 1-5 percent of the invoice or the amount borrowed. The accounts receivable are sold at a discount to the factor who in turn will collect from the party owing for the product or service provided by the business.
By factoring receivables, companies immediately benefit from improved cash flow; instead of waiting somewhere between 30 and 90 days or longer to receive payment, they will receive approximately 80-90 percent of the receivable in the form of an advance when the receivable is presented to the factor. In addition, the factor performs credit checks on customers to uncover any risks and help manage appropriate credit limits. Most factoringcompanies will also provide a follow-up service to assist with keeping the client’s customers paying more promptly.
Although commonly called a loan, factoring isn’t a loan; it’s the purchase of an asset, and in some cases the purchase can be structured on a Non-Recourse basis, in others it can be done with Recourse back to the company.
One thing to note is that factoring companies need to be more insightful about the inner workings of their client’s business than traditional lenders are. Since they are lending against their client’s outstanding receivables, it’s the factoring company’s job to know all about the client’s customers, terms, invoicing, and the billing process. Factors need to possess an in-depth understanding of their clients’ industries and the business nuances between their clients and the clients’ customers in order to be a positive partner for the client.
In your search for commercial financing, here’s something to factor into your consideration — it may be time to look at factoring in a whole new light.
Obtain a source of working capital for growth
Relief from responsibility for collection of no-pay and slow-pay clients
Fill more orders
Flexible funding program that increases as you increase your sales
Ability to take advantage of vendor discounts
To have funds for payroll and taxes
Extend credit to customers on large orders
Buy equipment or inventory on demand