What is Invoice Factoring?
When did Invoice Factoring appear in the United States?
Invoice Factoring dates back several centuries and was used, as early as the 1400s in England, to support business financing and overseas trading. With the arrival of the Pilgrims to America, factoring became a way to increase trade and has evolved over the years as an effective way to finance businesses’ working capital needs. As the nation’s banking system grew with more focus on loans to businesses, factoring has become an increasingly viable option for small, large and growing businesses with accounts receivable.
What is the difference in Factoring and financing through a Bank?
Most banking institutions support business through business loans. The bank will assess your business through credit checks, business history, the net worth of your company and sometimes your personal net worth as well. They will then decide on how much credit they are comfortable offering you, at what rate and for what length of time. The loan is provided and now becomes a debt for your company.
Factoring (sometimes called receivable financing or invoice factoring) is not a loan and therefore no debt is assumed through factoring - it is an asset sale for cash. The factoring company provides your business a line of credit based on your invoices for sale. There is practically no limit to the amount of financing other than the amount of your invoices and the credit of your clients. As long as you do business with creditworthy businesses, the factor will continue to advance to the limits of its available capital.
Who uses Invoice Factoring?
Factoring is used in all industries and types of businesses from small startup companies to large Fortune 500 corporations. It is used as a way to increase cash flow to expand businesses, hire more staff or employees and effectively run day to day operations. The main determinate of how much credit is available to you is what makes up the bulk of your accounts receivable. As long as the company has business to business receivables a factor is likely to be able to help. If the company sells directly to consumers then it will need to depend on credit card companies to factor its receivables.
How can Invoice Factoring benefit my business?
Instead of your business waiting for cash flow to arrive possibly 30 to 60 or even 90 days after invoicing your customer, the factoring company buys your invoice for a fee and provides you with the remainder or percentage of the funds within a short period of time (sometimes within 24 hours). Your business can access your invoiced funds quicker and with much more flexibility than a traditional loan will allow. You have the ability to choose how much factoring your business needs to grow, expand and operate your business. This can be particularly helpful for startup businesses that need immediate cash flow.
Not only does your business have faster and more flexible access to cash flow, but you also have transferred your accounts receivable responsibilities over to a company whose purpose is to efficiently and professionally track and handle accounts receivable saving you the stress, time and expense. The factor can enhance your relationship with your clients with its professionalism as it makes the billing and collection process smoother.
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