What is Factoring?
October 30, 2008 by Fred Rewey
Factoring is the purchase of accounts receivables from a business at a discount.
The factoring process enables companies to sell yet-to-be-paid invoices and immediately receive cash.
A “Factor” is a funding source that specializes in purchasing accounts receivables or invoices. Oftentimes the discounts are slight and well worth selling receivables to take advantage of steady cash flow.
There are many reasons a company engages in Factoring. Many times it facilitates expansion or allows the company to take on larger clients without having to provide collateral to banks and obtain a loan.
Additionally, since a Factor is typically looking at the strength of the payer (the entity that will be paying the invoice) it can also be an option for new companies and startups without extensive credit ratings.
Once the relationship is setup, a Factor can usually get the business owner money within 24-48 hours. The business owner can also pick and choose which invoices to sell.
How long does it take to set up the Factoring process? I know they can fund quickly.
Hello Douglas – it usually takes 5 -7 business days to set up a file and once the file is set up the client can usually receive their funding within 24 hours.
Is it not better to get a bank loan? Aren’t the fees in factoring very expensive? What about recourse?