What is Factoring?

Answer:
If you have clients taking more than 30 days to pay

their invoices it can make it difficult to manage your cash flow. In turn, this makes it hard for you to pay salaries and suppliers. If this is the case in your business, you may want to consider factoring your invoices. Factoring is a financial tool which can assist you in getting your invoices paid quickly.

Factoring provides your business with the necessary capital to operate. Factoring is not a business loan; however, it is usually easier to obtain than a business loan. Factoring your invoices means that you sell your invoices at a discount and, in turn, you receive immediate cash. The factoring company must wait to get paid; however, you’ll have immediate access to use the money. One of the most important requirements for your business to be approved to work with a factoring company is that your company works with clients that are credit worthy.

Costs vary for receivable factoring and are based the size and time of a transaction. Average costs are generally 1.5% to 3% of the invoice per month. After you sell your invoice to the factoring company, they provide you with an “advance” which is usually 70% to 90% of your invoice. After the customer pays the factoring company, you’ll receive an installment of 10% to 30%. (You will be charged for this transaction or “rebate.”)

The two main types of factoring are recourse and non-recourse factoring. In recourse factoring, the factoring company can come back to its client for repayment on the invoice if a factored receivable is not collected upon. In non-recourse factoring, the factoring company takes the risk of non-payment by the customer.