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Factoring

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e,. invoices) to a third party (called a Factor) at a discount in exchange for immediate money with which to finance continued business. Factoring is considered to be the most powerful financial tool available to small and midsize business and its strength lies in its simplicity and availability to most small and midsize businesses. Most importantly, factoring your invoices allows you to focus on sales and marketing and not chasing dollars to squeeze out the next payroll. Factoring allows you to compete head-on with larger, better financed competitors, and levels the playing field even if you’re a small business operator. With factoring, there is almost no contract or new business you will need to turn down due to lack of working capital and payroll worries. Minimum Factoring facilities lines start at $100,000.

How Invoice Factoring Works:

1. Each week you will sell your invoices for services performed or for goods you have delivered to your Factor who will typically advance 80-85% of the invoice face value.
2. After your customer pays the account, based on the terms you have granted, your Factor will then send you the balance not initially advanced on your invoices (15%-20%), minus a modest fee for factoring services.
3. Factoring fees are very modest given today's economy. In fact, a 30-day factoring fee is often less than what your customer would have paid his invoice with a credit card!

Advantages:

Companies that cannot offer extended terms to customers because of cash flow concerns can do so with Factoring. By being able to grant extended terms of 30 days, 45 days, 60 days or longer, Companies are able to compete more effectively and win more business over their completion leading to additional business from that customer.

Factoring differs from a Bank Loan in three ways.

1. The emphasis is on the value of the receivables, not the firm’s credit worthiness.
2. Factoring is not a loan – it is the purchase of a financial asset (the receivable / invoice).
3. A bank loan involves two parties; whereas factoring involves three parties.

Your Company’s lack of Credit:

Because factors are repaid for their cash advance by the normal payments that are received on the invoices purchased, your company's credit history (or lack thereof) is of little concern to factors. This makes factoring a perfect solution for new, startup companies, disadvantaged business enterprises, or almost any company that does not qualify for a typical bank loan due to the bank's more stringent lending policies.