What is Factoring?
Factoring is the one of the most innovative and flexible forms of financing available to businesses today.
By definition factoring is the purchase at a discount the debts owed to another.
In the marketplace, factoring in its various forms is also known as:
* Invoice Discounting * Cash Flow Financing
* Debtor Financing * Debtor Lending
Whatever name you attach to this type of finance the concept remains the same … a business sells (assigns) its accounts receivable (unpaid invoices) to raise working capital.
Factoring is known as the “credit card of business”, because the principle operates in much the same way as a credit card does for consumers. When a retailer sells a product or service to a consumer, who pays with a credit card, the credit card company (the factor) purchases the debt from the retailer at a discount (merchant fee) and the credit card company collects the debt from the consumer (debtor).
In the business world, when a company sells products or provides services to another business on credit terms, payment of the account is controlled by the customer. The selling company or service provider cannot predict when the invoice will be paid, even though credit terms may have been agreed. Cash flow is affected by slow paying debtors and as a result growth of the business is constrained.
Many businesses have historically relied on an overdraft facility to provide working capital. However, overdrafts are an inflexible form of financing – an overdraft limit is determined by the bank and it invariably relates directly to the collateral security available or being offerred.
With a factoring facility the available funding is linked directly to the sales thus ensuring that a business is able to take up those large orders allowing the business to grow … without the need to tie up the family home.