What Is Factoring?

Account receivable factoring is a wonderful solution for businesses that require additional capital for continuing their day to day business activities and for expanding their business. Factoring eliminates the wait period of 30-60 days and allows businesses to enjoy quick cash without undergoing the tedious process of inquiry and documentation followed by the banks for granting working capital to businesses.

Factoring is an effective strategy that allows your business to borrow against its invoices or accounts receivable. This will allow you to gain access to your hard earned dollars quickly so that you can reinvest them into your business or to pay outstanding invoices. Waiting for a vendor or client payment can be frustrating, especially if it is over a month or more away. Factoring offers your business an affordable financing solution.

How does Factoring Work?
Factoring is a finance tool designed to allow businesses to access cash quickly so that they can use it to operate and expand their businesses. One of the most attractive features of factoring is that it is actually not a business loan; it is an advance payment based upon invoices or accounts receivable owed to the business. The process of factoring is quite simple; first, the factoring company purchases an invoice from your business at a discount. Next, the factoring company will work to collect the invoice payment. Once they have collected the business payment, they will pay your business the rest of the amount owed. The fee that the factoring company charges will vary based on the volume of business that you do with them, the length of time that the invoice takes to be paid and in some cases, the credit of the company that owes your business money.

There are 2 primary forms of factoring: recourse and non-recourse. Companies that use recourse factoring make your company liable for any invoices that are not paid in full. Non-recourse factoring takes the risk of the invoice when they choose to purchase it from you. Factoring companies that leverage the non-recourse strategy will generally offer your business a lower purchase price to compensate for the added risk that they are taking. Depending on your current invoice payment history, you should choose the most financially viable option for your business.

Advantages of Factoring
When a business is evaluating available financing options, the process can become overwhelming. Also, if the business does not have established credit or the business owner does not want to co-sign on the debt, there are very limited financing options available. Factoring is not considered debt to the business and is not a form of a business loan. In fact, factoring companies are not concerned with your business’s debts; they are only concerned with the credit worthiness of the company that they are buying the invoice for. With this in mind, factoring is a great strategy for companies that are not only new, but those that have a short track record, weak financial statements or who cannot get traditional financing.

Another major advantage of factoring is that your business can receive cash flow earlier, typically in 1-2 business days rather than waiting for your customers to pay their invoices. While you are paying a nominal fee for the factoring services, the process speeds up, allowing you and your business to leverage those dollars to grow your business.

Factoring companies are also generally more effective at collecting payment for invoices as they specialize in this and have the dedicated resources to focus on this task. In comparison, your small business may not have those resources allocated to collect your invoices as efficiently or effectively.