What is factoring?

If you own a business that has customer payment terms of net 30, net 60, net 90, or more, chances are you may have experienced cash flow issues at some point. Although you may provide fantastic service to your clients, this does not guarantee that you will get paid on time. In comes factoring.

If you've had cash flow issues, factoring your receivables to cover business expenses is an option. Factoring is a transaction in which a business sells its unpaid invoices, or receivables, to a third-party financial company known as a “factor.” Factoring is a perfect solution for companies in need of cash flow to fuel the growth of their business. Waiting for customers to pay can be more costly than most realize, but with factoring, there is no need to wait.

 

A few key advantages. A factoring company can respond more quickly than most banks. A factor analyzes the credit of the customers who pay the invoices. This valuable credit analysis can be a huge bonus to any company large enough to extend credit to its customers, but not large enough to have its own credit department to assess risk. And finally, a factoring firm can provide immediate cash flow for operations without incurring debt. The process is simple, your business sells unpaid invoices to a factoring firm which advances payment, and then collects on your behalf from your buyer.

Factoring used to be thought of as a last resort for businesses in financial trouble.  Today, smart companies use it to manage financial bumps and take advantage of growth opportunities without going into debt.