The Ins and Outs of Factoring
Factoring is a business financing tool that refers to the purchase of an invoice by a factor at a discount so that the business, in turn, accelerates cash-flow or minimizes credit risk. It is a tool that has been around for decades.
Thanking Your Small Business
Educational Underwriter
Small Business Working Capital Learning Topics:
Factoring invoices, in concept, is quite simple. It's about having cash in hand today versus at some later date.
Factoring centers around managing accounts receivable. When your business sells a product or service to a customer on credit, an invoice is created. The invoice represents an accounts receivable. The customer is then responsible for paying the invoice at a later date when it becomes due. In short, your business has put up money and resources to complete the sale, yet does not recover the cost of goods sold - and hopefully a profit - until a later date when the customer actually pays.
Factoring offers a way for you to get paid sooner rather than later by selling the invoice to a third party referred to as a factor. The factor buys the invoice at a discount, which may range from 1% up to 3% of the normal commercial invoice's face value depending upon a range of factors. At the time the invoice is bought, the factor pays you anywhere from 70% – 85% of the total invoice amount. The remaining balance is paid to you, minus the factoring fee (the discount), once the factor collects the full amount from the customer.
By having the cash in-hand sooner rather than later, you can use it for other purposes. Therefore, while the discount actually represents an additional cost in the sales transaction, the cost is typically minimal compared to making your money work for you sooner.
Factoring Invoices vs. Accounts Receivable Financing
Factoring is different from Accounts Receivable Financing. With factoring, the factor purchases your commercial invoices and pays the company a discounted value of the total amount of the invoice. With Accounts Receivable (AR) financing, the value of the total AR amount is assessed and a loan is made to the company in a comparable amount with the AR serving as collateral.
"...that 1st PMFBancorp® specializes in invoice factoring and has helped thousands of businesses over the past three decades to improve cash flow? The benefits for your business in using accounts receivable (AR) financing are clear and direct. By outsourcing your invoice management to 1st PMFBancorp, you can free up collection resources to focus on other more profitable activities like marketing and selling your products. In addition, you can access working capital, enabling your business to overcome the problem of having the majority of your cash tied up in AR or inventory."
Learn More: Page 1 | 2 | 3 | 4 | 5 • • • Go to Top of Page
Other Small Business Working Capital Learning Topics:
Working Capital Know-How | Factoring | Alternative Financing | Increasing Cash Flow | Special Finance Services
As featured in:
www.BUZGate.org | An Osgood & Associates, Inc. project, all rights reserved Copyright ©202111 Court St., Suite 170, Exeter, NH 03833 USA | Terms of Use
Contact Us | About Us | Privacy | Add Content | Webmaster
AK AL AR AZ CA CO CT DC DE FL GA HI IA ID IL IN KS KY LA MA MD ME MI MN MO MS MT NC ND NE NH NJ NM NV NY OH OK OR PA PR RI SC SD TN TX UT VA VT WA WI WV WY
Free Small Business Help Resources | Free Small Business Solutions
Free Small Business Start-Up Resources | Free Small Business Growth Resources
Free Small Business Funding Resources | Free Small Business Training Resources
Free Small Business Network Resources | Free Small Business Success System
