Factoring
Factoring is a financial transaction in which a business sells its accounts receivable (invoices) to a third party, called a factor, at a discount. This provides the business with immediate cash flow, while the factor assumes the responsibility of collecting payments from the business’s customers.
How Factoring Works:
Invoice Creation: The business provides goods or services to a customer and issues an invoice.
Selling the Invoice: Instead of waiting for the customer to pay, the business sells the invoice to a factoring company for a percentage of its value.
Immediate Cash: The factor pays the business a significant portion of the invoice amount upfront (usually 70%-90%).
Collection: The factor collects payment directly from the customer when the invoice is due.
Final Payment: Once the customer pays, the factor deducts its fees and sends the remaining balance to the business.
Benefits of Factoring:
Improves Cash Flow: Provides immediate funds for operational expenses, payroll, or growth opportunities.
No New Debt: Unlike a loan, factoring doesn’t add liabilities to your balance sheet.
Based on Customer Credit: Approval is based on the creditworthiness of your customers, not your business.
Flexible Financing: Businesses can choose which invoices to factor, depending on their needs.
Ideal for Businesses That:
Experience delays in customer payments.
Operate in industries like manufacturing, transportation, or staffing, where long payment terms are common.
Need immediate cash for working capital without taking on debt.
