Accounts Receivable Factoring (also known as factoring), is the sale of invoices at a discount. It is simply a method of financing that is used by businesses to raise capital quickly and improve cash flow without going into debt. Accounts Receivable Factoring also know as: Accounts Receivable Financing, Account Receivable Funding, Invoice Discounting, Cash Flow Funding, and Invoice Factoring which is a short-term financing technique for working capital purposes, that finances a company with a collateralized security interest in a companies accounts receivables.
What is so nice about receivable financing is that you do not have to wait long periods in order to get paid so that you can pay your suppliers and employees on time. Fast growing companies typically cannot afford to wait 30, 60, or 90 days to collect payment because this cash crunch prevents them from generating new sales. In other hand, credit most likely to be a “must-sales-term” for any business attempt to opt-in competitiveness.
When a business delivers goods and services to an Account Debtor (Customer) an invoice is created. The business can turn around and sell this Invoice at a discount to a Factoring Company. Normally invoices carry net 30 terms, but in reality customers may pay in the net 45 – 60 range. If customers continue this practice of stretching your payment terms, it becomes very hard to cash flow and grows your business.
Instead of going through the long collection process a business can simply sell its invoice to a factoring company and receive funding within few days. The factoring company handles the collection and ensures the credit worthiness of the Debtors.
Factoring is not a new form of financing, but rather an old financial service dating back thousands of years. Multi-billion dollar corporations rely on factoring right now to finance their growth. Banks traditionally service these large corporations but often leave smaller sized businesses out. Only over the last several years has this void has been filled by the factoring companies which make funding available to smaller sized businesses to which banks are reluctant to lend funds. The typical factoring company is more interested in the credit quality of the debtor, while the banks may not look at financing a company without at least two profitable years in business.
You may want to read the following sub-topics too:
Types of factoring available in the market place.
Learn what advantages and disadvantages of factoring are.
A basic explaination about common fees of factoring, how it is structured, explained with case example for easier understanding.
Basic knowledge about funding process of a factoring.
A considerable guidance on how to choose a right factoring company to meet your need.
Additional worth consider tips for factoring buyer.
Jargons commonly used in factoring world.