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Receivables Factoring Explained

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. 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. Most businesses cannot afford to wait 30, 60, or 90 days to collect payment because this cash crunch prevents them from generating new sales.

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 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 grow your business. Factoring allows you to take control of your business and not be at the mercy of your customers.

Instead of going through the long collection process a business can simply sell its invoice to a factoring company and receive funding withing 24hrs. The factoring company handles the collection and ensures the credit worthiness of the Debtors.
The first step in the funding process is building a schedule of invoices that require funding. The factoring company will verify the invoices and ensure the credit quality of the Debtor. Since the invoice is sold to the factoring company, the debtor is notified to send payment directly to the factoring company. Now the factoring company funds the schedule of invoice and advances between 70% - 90% of the invoice face value. The percentage advance is based on the average credit quality of the debtors. After funding we play the waiting game. After a period of time the debtors make payments to the factoring company. Once the factor collects the full invoice value the reserve less the factoring fee is returned to the business owner.

Factoring provides over 100 billion dollars to industry each year. 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 in the cold. 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, but the banks won't even look at financing a company without at least two profitable years in business.

Financing your cash flow and growing your business is relatively easy with factoring. Most companies that get turned down for bank financing are refered to factoring companies. About 25% of our business actually comes from referrals the bank wouldn't process.

Learn more about the benefits here.


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