What is a Factoring Company?

Factoring companies are an excellent source of cash flow for small and mid-size companies. Factoring supplies the cash businesses use to meet payroll, manage expenses, and grow.

Invoice factoring, also referred to as accounts receivable factoring, is an alternative to traditional bank financing. Instead of getting a loan or line of credit, businesses with customers that pay on extended terms, sell their invoices to a factoring company, and receive an immediate cash advance. This simple transaction provides money that is used as needed.

How does the Invoice Factoring Process Work?

Invoice factoring begins when a business completes its work and generates an invoice. Rather than sending the invoice to it’s customer, the company sends the invoices to the factoring company. From there, the factoring company purchases the invoice and directly deposits the advance into the business’s bank account within 24 hours or less. Generally, the advance is around 90 percent. Once the end customer pays the invoice, the factoring company pays the remaining balance, less a small fee.

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Why Companies Use Factoring

• Invoice factoring is a source of consistent and reliable cash flow. Instead of waiting weeks or months for customer settlements, companies using invoice factoring have cash available to meet their financial obligations.
• It is a challenge for start-ups and emerging companies to qualify for traditional financing from banks. Companies in this situation use factoring because eligibility is based upon the credit and payment history of their customer.
• Factoring is flexible. Companies can use factoring for a short or long period of time. Factoring fees are volume driven and the more invoices a company factors, the lower the cost. As a company grows, increasing the factoring line is easy.