What is factoring?

In News by treyheath

Factoring is a transaction where a business sells their accounts receivable/invoices at a discount in exchange for immediate cash.

Still confused?  Don’t worry, we are here to help.

Factoring works perfectly for start up business funding or payroll lending and those business owners with bruised personal credit.  Most users are businesses that are growing rapidly and that fast growth scares lenders.

Factoring allows you to collect funds from your invoices faster.

Example

You own Best Consulting and you have a contract with the local school board.   On March 30th you invoice the school board for $1,000 and you expect to get paid in ten days.  The local school board is notorious for paying SLOWLY.  Realistically, that check won’t be paid until April 30th…. Maybe.  Your local bank won’t lend you the money because they don’t do start up financing.

Solution

Best Consulting sells that invoice to Fast Factoring on March 30th.  Fast Factoring advances 90% of that invoice ($900) by 2:00pm on March 30th to Best Consulting.

Fast Factoring waits to get paid by local school board.  Check arrives April 30th.  Fast Factoring sends Best Consulting $70 and keeps $30 as their fee for that invoice.

History of factoring

Factoring is actually one of the oldest forms of business financing.  It was started roughly 4,000 years ago by the Babylonians, but was later used heavily by the Roman that began selling promissory notes at a discount.

Later in the 1300’s the Italian shipping merchants advanced funds from delivered grain shipped across the world.  Factoring really took off in the United States in the early 1940’s during the manufacturing and textile boom.  Merchants, primarily on the east coast, saw this as a way to finance the growth of their rapidly expanding businesses.

Will my clients look at me differently?

Highly unlikely.  Factoring is very commonplace among small businesses and in fact, your client may be factoring as well.   Our notification is typically sent to the accounts payable department, where all they do is change the address on where the check is sent.

Factoring can be used for a variety of  business reasons.  All your clients really care about is can you deliver the goods or services you promised.

Will you contact my clients?

NO.  If a payment is beyond normal terms, I will call and ask YOU to follow up with your client.  It is YOUR client that you have the relationship with and we don’t want to interfere with this.  As long as you and I can discuss the status of late payments, there isn’t ever a need to call your client.