 Factoring is the buying of an asset, your accounts receivable (invoices) from a business at a discount. It allows cash that is normally tied up for a 30, 60 or 90 day waiting period to become immediately available to you. In this way if you have this additional cash you may do much. For example, you can take advantage of growth opportunities, diminish debt or pay daily or monthly operating costs. Of course you want to improve your cash flow and generate working capital for your company. And factoring is a fast, easy and flexible way to do this which allows you to achieve the success you are striving for.
Factoring has evolved far beyond its early roots in Colonial days and has emerged into a widespread financial alternative for businesses of all types. With the help of this businesses can generate cash to pay bills, create greater benefits.
But you should remember that factoring is not a loan. It is the buying of an asset, your accounts receivable, at a discount by a financial institution. There is a reason between factoring and bank loan. With a traditional bank loan all of your company assets are used as collateral. It also typically requires personal guarantees. But factoring depends on the credit-worthiness of your customers, not your balance sheet or history.
Moreover, factoring does not add debt to your balance sheet, and there are no loans to repay and there are no monthly payments of principal or interest. If you sell your accounts receivable to a factor and do not borrow them from a bank, you simply convert one asset (accounts receivable) into another asset (cash). Factoring accounts receivable, you can improve your cash flow or help to accelerate your growth. As there are no lengthy applications or loan committees, factoring can be short-term or part of an ongoing financing program. So, as there is no requirement for a long-term credit history, new companies can profit as well.
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