What is Factoring?
Factoring, is a type of invoice financing many companies use as a source of cash. Factoring is sometimes called accounts-receivable financing or invoice factoring. With factoring, companies sell their accounts receivables (invoices) to a third party known as a factoring company. By selling their invoices, these companies receive immediate cash, instead of waiting 30, 60 or even 90 days for customer payment.
Invoice factoring provides companies the cash they need to operate their business. Factoring is not a loan, so there is no debt incurred. The cash received from factoring is based on the credit and payment history of a business’s customers, not that of the business itself. This makes factoring advantageous for companies that might not qualify for traditional lending, or don’t want to increase their debt.
Factoring Vs Business Loans
While many businesses turn directly to a bank when they need working capital, it’s not as easy as you may think. The process of getting business loans can take months and creates debt on your balance sheet. Banks use your company’s credit to qualify the business for business loans and business lines of credit. Companies with no credit or less-than-perfect credit can’t obtain substantial cash to maintain and grow their business. Even if your business does qualify there’s a limit to how much you can access, which can hold your business back from its ability to grow.
