What is Factoring?

what is factoring

Do you own or operate a business that is stable and growing, yet experiences cash crunches when it comes time to pay suppliers or cover payroll because you wait 30-45 days to get paid by your customers? Have you been to the bank in need of capital and been turned away because you have not been in business long enough or because you operate in an industry that banks consider too risky? If so, you may find that putting your accounts receivable to work is one of the easiest and fastest ways to obtain working capital for your business. You may discover that invoice factoring is the perfect fit for your business!

Invoice factoring is a flexible financial solution that can help your business be more competitive while improving your cash flow, credit rating, and allowing you to utilize supplier discounts. Unlike traditional bank financing, invoice factoring relies on the financial strength and credit worthiness of your customers, not you.

Invoice factoring is when a business sells unpaid accounts receivable invoices to a specialized financial institution called a Factor. The factoring company buys the invoice from the business for an amount less than its actual face value, then later collects the full amount of the invoice from the account debtor when it finally comes due. This service is useful to a business that cannot afford to wait 30, 60, or 90 days to collect payment from customers or when cash is needed immediately for growth or survival.

Because of its popularity and simplicity, invoice factoring is nearly a 100 billion dollar a year industry. In fact, invoice factoring is an old financial service used by multi-billion dollar corporations that is now available to small and mid-sized businesses to which banks are reluctant to lend funds. Invoice factoring fills a tremendous void that exists in our economy.

Many new and growing companies have trouble obtaining traditional bank financing due to their length of time in business, profitability or financial strength. Invoice factoring allows these companies to convert their accounts receivable into instant cash. Once you have delivered your product or service and generated an approved invoice, you can get your money in as little as 24 hours from a factor. Invoice factoring can help a company stay current with its vendors and other financial obligations such as payroll and taxes.

Other types of financing generally require two years in business and showing a profit. Invoice factoring does not have this limitation. Young, growing companies or stable, well-established companies in almost any industry can obtain the working capital they need through factoring.