What is Factoring?

Factoring is financial transaction used by many businesses that are seeking to manage their working capital flow more effectively. Many businesses have a difficult time controlling their working capital flow, when they cannot rely on the timely collection of invoices or have a seasonal cash flow cycle. Having a sporadic capital inflow hurts businesses projecting future results, investing in business growth, and even paying day-to-day bills. Factoring alleviates the problems associated with irregular cash flows by advancing businesses the desired amount of outstanding invoices. After the advancement the Factor, the financial service company that purchases the invoices, directly collects the invoice payments from the debtor.

Factoring often serves as a bridge loan for businesses in need of capital to either expand or cover certain obligations. For businesses in need of capital, factoring often presents a good alternative to a long-term bank loan because it has a more expedient application process and requires different acceptance criteria. Because factoring shifts the risk of collectability from the business applying for a loan to the debtor of invoices businesses can often be approved for a factoring agreement easier than a bank loan. Additionally, factoring can be a short-term cash flow solution to businesses anticipating venture capital.