What Is Factoring?

Accounts receivable financing (Factoring) is a simple cash flow solution for many businesses. The process of converting accounts receivable into cash is a simple and straightforward process that has been in use for thousands of years. This process is commonly called Factoring and has been used since Roman times and is used today by some of the largest companies in the world. Until recently it was mainly available to very large companies who dealt in huge dollar amounts, like American Express.

Today this service is available to almost every business that provides a service or product to another business or to a government entity. Key to the factoring of accounts receivable is the fact that funds become available at the point of sale.

Unlike bank financing, factoring is easy to set up and does not require extensive prerequisites. With factoring you do not tie up your assets as collateral and you do not have to take out a loan.

In many situations, factoring is more appropriate for your business than bank financing. Factoring has the following characteristics:

• It is based only on your accounts receivable. Your ability to raise cash by factoring is based on just the accounts receivable of the business, rather than on traditional measures of your financial strength and stability.
• Provides your business with continuing cash flow without the requirement of periodic payments or interim payoffs. New sales by your business continuously create new power to obtain cash and your business does not have to deal with the renewal of loans or worry about maturity dates.
• Gives your business access to UNLIMITED cash, subject only to your ability to sell your products or services. There is no ceiling beyond which a factoring company (Factor) will stop providing cash to your business. The more sales your business makes, the more cash it can draw. The Factor does not concentrate on your debt/equity ratio to provide funds, as do traditional lenders.
• Offers your business a dependable and continuing source of cash without the necessity of making separate loan applications.
• Eliminates the need to obtain funds from venture capitalists which would receive an interest in your business and generally have a say in how the business is run.
• Saves you precious time waiting for a bank to grant or deny your loan. Bank’s decisions are influenced by many considerations and the outcome is often unpredictable. With factoring, periodic delays and negotiations are eliminated, allowing you time to do what you do best, run your business.