In the world of financing, factoring is when a business sells its account receivables to another company. In turn, the business receives cash and can use it however they want or need it. Essentially, if a business is owed $5000 from a customer, and the customer’s bill is due in one month, but the business needs that $5000 next week, they can sell that $5000 invoice to another company that will give them the cash right away. That company is known as the factor. When the customer pays the $5000 bill, the factoring company processes it and receives that money. Often, the factoring company buys the account receivables at a discount or charges interest for lending the cash upfront.
Some people are wary about using factoring, as they do not want to pay the interest, are unfamiliar with this concept, or have had negative experiences related to it in the past. Increasing familiarity and working with the right factoring companies can change their viewpoints and they can see the value is using it.
One thing to recognize is that factoring is a very common and very dated process. It has been used for thousands of years in a wide range of businesses. Most people who own businesses can qualify for factoring because it does not require them to have the best credit score or to have a company that has existed for decades. It can be easier to use factoring than acquire bank loans, which can take a long time to get.
While factoring does charge interest rates, they are relatively low. Factoring fees are not the same as bank loans. Additionally, if the contract is 12 months long, some of the loans can be paid off ahead of time, which means the business will be charged less in interest. For example, if a customer pays the $5000 invoice in one month, the business pays the factoring company at the time, rather than waiting until the end of the contract.
Another perk of using factoring is that the company that lent the cash will be the one that processes payments and invoices. This means that the original business does not have to spend the time receiving the invoice and depositing the check when they would rather be focused on other parts of their business.
Many companies benefit from using factoring to grow and maintain their businesses and will continue to use it in the future.
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