WHAT IS A FACTORING??

Factoring can be defined as: "the purchase or sale of a business's invoices for cash at a discount."

In other words, a business may collect money owed on an invoice immediately, by accepting a reduced amount in cash from a third party, thereby unlocking cash tied up in 30-, 60-, or 90-day terms to its customers. This third party is known as a "factor".

Factoring is most often used by growing or struggling companies to solve cash flow problems— it fills the financial gap between the time of making a sale and the time the customer pays. Sometimes a business can't afford to wait to get paid after delivering their product or service— especially when products are sold on 30, 60, or 90 day terms. The business may need to meet payroll expenses, rent, or other overhead. Or, perhaps the money is needed to buy supplies to fill incoming orders. In any case, factoring gives that business access to cash in a few days rather than months.

Just about any business that generates invoices can factor, including businesses with no collateral and no earnings. Factoring has several benefits over conventional forms of funding, such as bank loans, some of which are: speed of funding, unlimited access to cash, independence of your credit rating/credit worthiness, and consistent control and ownership.

What is factoring? Factoring is the process of purchasing commercial invoices from a business at a discount. Factoring is essentially a credit service designed to improve cash flow - the factor assumes the credit risk of loss resulting solely from the failure of debtors to settle approved invoices because of financial difficulties.

There is a subtle, yet distinct, difference between factoring and what is thought of as financing. Factoring is not a loan. It is the purchase of a debt instrument (commercial paper) at a discount. Today, factors exist in all shapes and sizes as divisions of large financial institutions or, in larger numbers as individually owned and operated entrepreneurial endeavors. With banks becoming too expensive and inflexible due to heavy regulations, the small businessperson was forced to find other sources of financing for expansion and growth, causing factoring to become an increasingly popular option.

There are basically two types of factoring - recourse and non-recourse. Recourse factoring is where the client is liable for payment in the event the customer does not pay. Non-recourse is a type of factoring where the factor assumes complete responsibility for collection of a debt. If the debt is not collected due to the financial inability of the customer, the factor assumes the loss.

Your company will benefit from factoring if any of the following apply to you:

Do you do business with creditworthy customers?
Are you a growing business with the majority of your capital tied up in accounts receivables?
Do you expand but don't want to incur debt or overhead increases because you are operating on a slim profit margin?
Does your company generate at least $10,000 per month in accounts receivables?
Are the terms of sale 30 - 60 days?

Factor have the ability to solve many of your financial as well as administrative problems. It could assist you in the following:

Help you make your payroll on time.
Accelerate cash flow needs
Help you control your growth in an orderly manner
Give you detailed management reports as to your collections
Help your company build a good credit rating.
Screen and in some cases insure new customers
Allow you to utilize the funds paid in anyway you choose.
UCC1's on receivables only - leaving personal assets and equipment free of any legal encumberments.

Factoring will not create debt on your financial statement, it will help you increase your buying abilities, it will help you improve your credit rating and thus make you eligible for low cost bank loans. It will help eliminate the need for additional office staff to process, track and collect your invoices. In short, factoring may be the vehicle that allows you to grow while eliminating venture capitalist or partners that will share in the ownership of your company.

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