To Factor or
Not to Factor?
by: Marty Milan
The purchasing of accounts receivable (invoices)
is generally known as factoring. Businesses can sell
their invoices to companies known as factors.
Although not all businesses are familiar with
factoring, historians claim that factoring dates
back to the ancient Roman civilization making it one
of the world’s oldest methods of finance.
In the past, merchants used factoring to settle
their trade debts among each other. Fast forward to
today’s businesses profiles and it is apparent that
factoring is still a very viable business tool for
businesses all types and sizes. Can factoring work
for your business? Consider the following benefits:
- Factoring provides a company with a continuous
working capital, thus increasing their cash flow.
- Factoring has no limits, offers quick results
and it’s accessible as well as flexible.
- Factoring stimulates growth and can finance
expansion without debt.
- Factoring can increase production and sales.
- Factoring is not a lending service, rather it
is thought of as a discounted purchase.
Factors do not normally charge interest, they
simply buy the businesses invoices at a discount and
collect a fee. Do not confuse the purchasing of
invoices as a loan. Many small to mid-size companies
that apply for a bank loan are usually turned down.
Banks consider the amount of assets that a business
has in order to secure the loan; Therefore, banks
normally require a great deal of collateral from a
business before they are approved for a loan. If and
when a loan is approved, it may only be a small
percentage of the businesses total accounts
receivable.
Factors are different, they are not subject to
the same guidelines and regulations that banks are.
Factors look at the credit worthiness of the
business’s customers, not the credit of the business
itself. The purchasing of accounts receivable never
creates a debt to the business it simply gives them
the opportunity to access their future money
immediately.
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