Factoring is a form of asset-based financing and is the process of selling commercial accounts receivables by a business in order to obtain immediate cash payment of the accounts before their actual due date.
Factoring differs from borrowing in that the accounts receivables are actually sold rather than merely offered as collateral. The net result is that your company can convert its receivables into immediate operating cash so that you will not have to wait 30, 60, 90 days or more for your customers to pay.
This process places the time, cost, and effort of collection into the hands of a funding company, allowing you the time to concentrate on what you do best – run your company. Your company receives the cash it needs, when it needs it, so that you may best manage your business.
Factoring can be a great option for companies that need money quickly, but who aren’t able to secure a conventional, bank loan. Factoring is known by other names. Receivables factoring, invoice discounting, invoice factoring and debtor financing are other commonly used names.
Factoring benefits both companies. The seller gets the capital that they want or need and the factor is able to make money by charging the seller a discount fee on the invoice.
A good factoring company will research the credit history of the seller’s customers prior to purchasing the invoices. They will want to be confident that these companies have a history of paying their bills.
Factoring is a way for companies to infuse cash into their business without taking on additional debt. By selling their accounts receivables at a discount, they can get money right away without having to wait to collect it themselves. In exchange, the factor, is able to make money on the invoices by charging the company a discount fee for their services. One company gets the money they need to continue operating and/or grow their business, while another one has the opportunity to make money by helping businesses grow and prosper.