What is a Factoring Firm?
A factoring firm is a privately owned financing company that buys unpaid invoices at a discount in return for providing immediate cash flow to a business. Invoice factoring is usually done by businesses who can’t or do not want to take on a bank loan and differs in its terms from loans, credit, or venture capital. These firms provide an excellent backup plan for businesses who may not have the best credit standing with the banks or have simply been rejected for a loan in a tough market.
Simply put, factoring firms buy a business’ unpaid invoices in bulk at a discount. The business gets an immediate injection of capital to fund payroll, manufacturing or supply costs, distributors, or anything in between. Why do they do this? They make their profit on the difference between the discounted price they pay for the unpaid invoices and the full price paid. The firms also take care of the collections process which is a whole other headache.
Factoring Firm Process
The process is a backup plan to bank loans. In a tough economy, banks are simply unwilling to lend money for a number of reasons. Perhaps your business does not have the greatest credit rating or other factors prevent the banks from giving you a loan. If you have orders and invoices, however, you are a fully functioning business and should not be left out in the cold. Factoring companies allow you to turn the business that you have already done but have yet to be reimbursed for and continue running your business.
Invoice factoring is also an alternative and backup to trying to obtain venture capital. Rather than try to sell equity in your business for a quick boost of financing, you can simply sell your invoices and continue running your company and keeping all of the decision power and profits.