Factoring is a great way that businesses can get a lot more money than the banks can give to them. Factoring is a kind of financial transaction where a business will sell its invoices to another party, and this party is referred to as a factor, and the factor becomes a verb, as in factoring, to help explain it. It’s a term that sums up one way of businesses getting cash for their unpaid invoices. It’s a way of doing a cash infusion for some businesses when cash is available no other way.
In factoring, the three parties that are involved directly are the entity who sells the receivable, the account debtor, and the factor. The receivable is basically a financial asset, and it’s connected to the liability of the debtor to pay. The seller will sell one, or even more, of his invoices, which are also called receivables, at some kind of a discount to another party.
The receivable sale basically transfers ownership of the receivables to the factor, and it indicates that the factor has gotten all the rights connected with the receivables too. So, the factor will nab the right to get the payments offered by the debtor for the amount of the invoice, and, in factoring that is of the nonrecourse kind, will have to deal with all the loss if the debtor doesn’t pay the invoke completely because of his or her inability to pay financially. Often, the debtor will be notified when the receivable is sold, and the factor will bill the debtor and then make the collections. In non-notification factoring, however, where the seller collects the accounts that are offered to the factor, as an agent of the factor, also happens.
Factoring has had a long history. It is by no means some newfangled way of doing business that has become more popular after the millennium like so many bad financial practices. It is a legitimate practice, and it has gone back several hundred years. It’s also by no means illegal or wrong. It’s a standard way of doing business. In some industries, it’s the main way of doing business.
Accounts receivable factoring is also called accounts receivable financing in some circles. It’s a quick and flexible source of funds for businesses. They just use your accounts receivable as the security for the funds that you are going to get. Some companies will even let your credit line grow in proportion to your sales cycle. Companies might fund as little as $5,000 in a month, or they might fund up to $10 million for larger companies. The loans are dependent on the flow invoices coming in, so there is probably going to be a reasonable basis for the loan, whatever amount it is.
You can check out the receivable financing rates at the company websites you are considering getting loans from. You can also check out their other qualities that they have too. It might be the only way for your company to get funds.