What is Factoring?
Even though invoice factoring is not something new, there are still many people who have never heard of it before or simply don’t understand what it is. So exactly what is factoring? According to Wikipedia:
“Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.”
In the simplest terms, factoring takes place when a business sells its invoices to a factoring company for less than the full value of the invoices. The result is that the business receives “payment” on the invoices they factor much sooner then they would have if they had waited to collect directly from their customers (check out our Factoring Service FAQ page for more information on exactly how factoring works). Now, while these definitions may technically help address the what is factoring question, we hope the following items will provide an even better understanding:
Fast
Invoice factoring provides a way for you to essentially receive payment from your customers on the very same day that you invoice them. Once you’ve established your factoring account, you can receive cash for your invoices within 24 hours in most cases. As a result, factoring essentially “fast tracks” your collection time. No need to wait weeks for capital you need today.
Flexible
Think of factoring as “on demand” funding. You decide which invoices to sell and when to sell them. This means that if you don’t need additional capital one month, or if there is one customer that always pays quickly, you don’t have to factor those invoices. This puts you in the driver’s seat when it comes to managing the timing and amounts of your cash flows. We like to compare invoice factoring to offering an “early payment discount” with one major difference…you decide if/when and which of your customers pay early! We explain this further Here.
Easy
While it is true that both the concept and process of factoring are easy, what we are really talking about here is how easy the application and approval process is. Unlike traditional bank financing, factoring is not focused on the credit-worthiness of your business, but is instead focused on that of your customers since they are the ones that will effectively be paying the factor. As a result, approval can be very easy. Chances are that if your business sells products or services to other credit-worthy businesses on payment terms, then you can quickly be approved for a factoring account!
What is Factoring Conclusions
When considered together, the above items begin to provide a more useful answer to the what is factoring question than any simple definition ever could. If you’d like to learn more about the benefits of our factoring service or if you’re ready to get started, please Contact Us now.