What is factoring?
Factoring is a transaction in which a business sells its accounts receivable (invoices) to a factoring company, also known as a factor. In exchange, the factor immediately advances cash to the business. Factoring is a comprehensive financial service available to companies of all sizes. In addition to providing instant access to cash, factoring combines credit risk protection, accounts receivables bookkeeping and collection services.
What are the benefits of factoring?
- Factoring improves your company’s liquidity by providing instant access to cash tied up in unpaid invoices.
- Factoring saves time and reduces expenses of managing your company’s receivables. The factoring company will handle managing and collecting payments from customers. The time and effort spent on these time consuming activities can be redirected to the company’s core business.
- Factoring protects your company from bad debt. Factor takes on the risk of non-payment by your customers.
- Factoring is an easily accessible form of financing. Unlike conventional bank loans, factoring does not require collateral. Also, factoring requires fewer procedures and allows faster advancement of funds to the company.
- Factoring is not a loan, therefore it does not add to the liabilities on your company’s balance sheet.
- Factoring allows your company to be more competitive. You are able to offer longer payment terms to customers without hurting your company’s liquidity.
Factoring spans all industries and is a perfect financial tool for companies that:
- look for a flexible source of financing that is customized to the way their business operates
- sell on credit (defer payment for their buyers)
- have a circle of regular customers
- seek sources of financing other than conventional loans
- want to eliminate the risk of non-payment by their customers
- need to improve or maintain payment discipline of their buyers