Factoring is a transaction in which a business sells its invoices, or receivables, to a third-party financial company known as a “factor.” The factor then collects payment on those invoices from the business’s customers. Factoring is known in some industries as “accounts receivable financing.”
Factoring allows your business to receive cash quickly on its receivables, rather than waiting the 30 to 90+ days it often takes a customer to pay. Factoring allows you to quickly build up cash flow, which makes it easier to pay employees, handle customer orders, and grow your business. Factoring enables you to receive a large percentage of the invoiced amount, typically 75-85% within 24 hours. Your industry, your customers’ credit histories, and other criteria determine the advance rate received.
For example, let’s say your company averages $100,000 in receivables each month. Usually, very little of that is collected at month’s end because customers wait longer than 30 days to pay. If you were to factor that $100,000 invoice, you would receive a cash advance between $75,000 to $85,000 in the bank at months’s end, instead of zero!