Factoring
Factoring is a financial transaction whereby a business sells its account receivables (i.e. invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business operations.
Advantages:
Factoring is often considered to be most powerful financial tool available to small/mid-sized businesses. Factoring allows your business to focus on growth from sales and marketing, rather than just chasing dollars for payroll. With increased capital, you are better suited to compete head-to-head with larger, better financed competitors, leveling the playing field for even a small business operator.
The strength of factoring lies with its simplicity and availability. There is almost no contract or new business you will need to turn down due to a lack of working capital and payroll worries. Minimum factoring facilities lines start at $100,000.
Companies that cannot offer extended terms to customers because of cash flow concerns can do so with Factoring. By being able to grant extended terms of 30 days, 45 days, 60 days or longer, companies are able to compete more effectively and win more businesses over there competition leading to additional business from that customer.
How Invoice Factoring Works:
Each week you will sell your invoices either for services performed or for goods you have delivered to your Factor. These advances are typically between 80-85% of the invoice value.
After your customer pays the account, based on the terms you have granted, your Factor will send the remaining balance of invoices (15-20%), but with a modest fee for factoring services.
Factoring fees are very modest given today's economy. In fact, a 30-day factoring fee is often less than what your customer would have paid his invoice with a credit card!
Factoring difference from a bank loan in three ways.
The emphasis is on the value of the receivables, not a firm's credit worthiness.
Factoring is not a loan — it's a purchase of a financial asset (the receivable / invoice)
A bank loan involves two parties; whereas factoring involved three parties.
Your companies lack of credit:
Because factors are repaid for their cash advance by the normal payments that are received on the invoices purchased, your company's credit history is of little concern to factors. This makes factoring a perfect solution for new, startup companies, disadvantaged business enterprises, or a company that does not qualify for a typical bank loan due to the bank’s more stringent lending policies.