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Category Archive: Factoring

What is Factoring

 What is Factoring (Accounts Receivable Finance)?

 

It is basically a transaction where a business sells its accounts receivable or invoices to a third party commercial company which is known as a factor. Factoring is done so that business can receive cash in a quicker time. It is also called accounts receivable financing which is similar to but different from an ABL loan. The benefit of factoring is that instead of waiting one or two months for the payment of a customer, you now have that much cash to control and lead your business effectively.

How does factoring take place?

  • Provide a service to your customer.
  • You send your invoice to a factoring company.
  • You receive the cash in advance on your invoice from the factoring company.
  • The company collects full payment from the customer.
  • The company then pays you the rest of your invoice amount minus a particular sum.

 

Benefits of factoring

  • It has no limit to the amount of financing.
  • Factoring is beneficial for start-up businesses that need cash immediately.
  • The financing does not show up as debt.
  • It can be customized so that it provides the required amount of money when the company is in need.
  • It is based on the customer’s credit quality.

Origin of factoring

The origin lies in overseas trade among nations. It started as a business in England first and then proceeded to America with the pilgrims in 1620. Factoring has evolved over years. It started in the United States for companies to get more cash as many companies faced difficulties getting a secured loan from the bank.

Who all does this factoring?

Companies of all sizes use factoring to increase their cash flow. Factoring is done by all industries like manufacturing and distribution, trucking, transportation, textiles, staffing agencies and oil and gas. Companies use this cash produced from factoring to buy new equipments, hire employees, pay for inventory and expand operations. It allows a company to take quick decisions and expand at a faster rate.

Banks have strict requirements in order to obtain a conventional loan. It may take a long time to take the decision as it depends on the business owner’s credit scores. Factoring helps you buy your eligible invoices at a discount and pay you the maximum of the total amount within hours of verification.

In invoice factoring there is no debt to repay and there is unlimited funding potential. It also has a faster rate of approval that is within 3 to 5 days. The approval is based on the credit strength of the client. Business startups are allowed factoring

On the other hand in bank loans the principal and interest is repaid over time and the funding potential is capped by banks. The approval may take a long time and based on company’s credit history. It is very tough for business startups to get a loan.

Conclusion

The terms of factoring vary from industries and financial service providers. Most factoring companies will purchase your invoices and will provide you money within 24 hours. The factor provides you back office support.

 

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