Factoring is a financial tool that allows small and mid-size business owners to capitalize of their slow paying invoices. Factoring allows the business owners to turn their invoices into immediate cash, allowing them to fund their day-to-day business operations. Unlike bank loans, where bank lending relationship is on the creditworthiness of the small business and not that of its customers, small business owners can benefit from factoring because invoices from strong credit worthy commercial clients are excellent collateral for factoring companies. Although majority of banks won't take invoices as collateral, factoring companies are more than willing to provide small business owners with capital based on their invoices. One important thing to know about factoring is that it does not generate debt. The factor does not loan you money for your invoices. What the factor does is to buy your receivables from you at a small discount. Since factoring is not a loan, qualifying for them is very easy and it provides order for your financial statements.
Another benefit factoring has, when compared to bank loans, is that bank relationships provide a more limited availability of funds and none of the bundle of services that factors offer. Factoring is an appealing alternative to raising equity for small fast-growing firms. Factoring also can be used to turn around a good business whose management has encountered some rough times or made some bad business choices that constrained their chances to work within the boundaries of a bank line's credit terms and conditions. Using factoring for this purpose is that it helps the firms with time to make the right changes required to turn the business around.
Some large firms use factoring without any negative implications to show cash on their balance sheet rather than an account receivable entry, money owed from their customers, particularly when these show payments being due for extended periods of time beyond 60 days.
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