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What Is Factoring?

What Is Factoring?

Factoring is a powerful form of working capital finance utilized throughout the world and for those exploring a career as an independent industry freelance broker, this short video and links to our magazine articles will provide you with a “first look” and this remarkable form of business finance.  Though simplistic in nature, there is much to learn about factoring if you are seeking a career as an independent consultant.

What is Factoring?

In simple terms, factoring or accounts receivable factoring is the sale of the accounts receivable of a business at a discount to a finance company known as the factor.  Factoring is commonly employed by businesses that sell B2B and grant extended terms of payment to their customers for goods or services purchased, allowing those customers to delay payment upon invoices for 30, 45, 60 days or longer.  Factoring is probably the oldest form of commercial finance known to man and is employed as a business finance strategy in almost every corner of the globe. 

It is important to keep in mind as you develop your knowledge of this powerful financial tool, factoring differs dramatically from most other forms of commercial finance in that true factoring is never in the form of a loan.  Factors actually purchase the accounts receivable of a business, a trait that sometimes gives factors certain advantages over more common commercial lenders. 

A Simple Cash Flow Solution

When one business sells to another, it typically provides 30-60 day terms for invoice payment.  While such liberal arrangements can attract new customers and increase sales, it can also cause serious cash flow problems for the small business that offers them.  Additionally, many customers can take even longer to pay than the time permitted, causing even more severe problems

Factors eliminate such problems by purchasing invoices immediately at the time of sale.  With factoring, a business owner can still offer attractive terms of payment to customers, but then sell the invoice for the sale to a factor and get immediate cash.  As the new owner of the invoice and payment obligation, the factor then waits to get paid by the customer.

What’s Required for a Business to Factor

Factoring arrangements are characterized by their simplicity and almost any business that sells B2B and invoices for their sales can employ factoring.  This includes virtually brand new businesses with little or no established credit.  To qualify for factoring, a business must…

  • Have accounts receivable (invoices) that are verifiable and payable without condition
  • Not have other existing financing that uses the accounts receivable as collateral
  • Have creditworthy customers (those that pay the invoices
  • Must not have any sizable federal tax liens

Unlike traditional bank loans which require strong financials and profitable business history, factoring is a very flexible form of finance available to even the youngest of businesses.  In fact, a specialized form of factoring known as “DIP” factoring can even be provided to companies operating in Chapter 11 bankruptcy.

Availability for Service CompaniesVery High
Availability to ManufacturersVery High
Availability to RetailersNot Available
Time Required to Establish5 days or less
Credit Required by ClientLittle or None
Minimum Financing Size$15 -25 K
Maximum Financing SizeUnlimited
Geographic AvailabilityMost Major Nations