The Real Truth about Factoring Loans

Is factoring a loan? This is one of the more confusing aspects of factoring, because it is a way of getting funding for companies which need a loan to stay afloat. It doesn’t help that the term “factoring” can sometimes mean a loan when invoices are used as collateral. These factoring loans are often called “invoice discounting”.

What is Factoring?

So, let’s clarify the issue once and for all. Factoring involves the sale of accounts receivable to a third party finance company, called a factor. As such, it’s not a loan at all.

The factor buys the accounts receivable and in return they pay about 80% of the value of the invoice in advance. If you’re the business with the accounts receivables, you can then use the advance money for a wide variety of business functions—to meet payroll, pay for supplies for upcoming projects, or pay for debts that need immediate servicing. Once your customers pay the full amount of the invoice, the factor then forwards the money to your business after it has taken out the fee for its services.

Since factoring involves the sale of the invoices, the factor is paid directly by the customers.

Advantages over Other Forms of Financing

So why has factoring suddenly become so popular among many small businesses? The reason is simple. Ever since the most recent economic crunch, banks have become a lot more hesitant to lend to small businesses. The small amounts of loan needed by small businesses take a lot of effort to process, but the potential profit is too little. Also, the risk is often deemed too great by traditional banks.

That is how factoring became popular. Factoring has already established itself in several industries (most notably the garment industry) but of late it is now a recognized alternative form of funding for just about every industry. Factoring has a much higher approval rating than traditional loans, and the entire process takes very little time in comparison.

Factors don’t really much care about the credit of your company. Instead, it matters more to them that your customers have a good credit history. So if you have reputable customers, you can get the funding you need through your accounts receivable.

Another benefit is that with so many factors offering their services, you can pick out the best option. Perhaps one factor offers a much higher advance than average, as some claim to offer advances of up to 90% of the value of the invoices. Others offer lower fees so that when you get the rest of the money when your customer pays in full, your profit margin is not as reduced as it would be with other factors.

Some factors offer long experience in your particular industry, so that they know which of the potential customers have the best track records for paying fully on time. Others brag about excellent collection services, so that your customers are not alienated when they have to pay a factor instead of your company.

Nowadays, banks have come to recognize that factoring is already considered a perfectly acceptable form of funding, which is why many factoring companies are owned by banks as well.

 

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions. Give us a call toll free at 1-888-382-3766 or Visit us online at www.neebocapital.com

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