What Is Factoring?

Factoring is asset-based financing where a company sells their accounts receivables to obtain immediate cash payment. This method of financing is difference from borrowing. The accounts receivables are sold versus offered as collateral as in a traditional loan. This allows your company to convert its receivables into operating cash without having to wait for your customers to pay. Factoring puts the onus of collection into the hands of a funding company, allowing your company to focus on making money rather than chasing down payments owed. Your company gets the cash it needs to operate immediately allowing you to best manage your business. Factoring can be the perfect alternative to 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 works well for both the factor and the company needing immediate cash. The seller gets the working capital they need and the factor benefits by charging a discounted rate on the invoice amount. A quality factoring company will research the credit history of the seller's customers prior to purchasing the invoices. It's important to make sure your factor is doing this in order to mitigate risk and provide you with the most successful transaction possible. Factoring is a great way for companies to get the cash needed into their business without accumulating additional debt. By selling their accounts payables at a discount, the business can get cash right away without having to wait to collect invoices that could take 90 or more days. In exchange, the factor, is able to make a profit 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.