 What is 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 "advance" factoring, the factor
provides financing to the seller of the accounts in the form of a cash
"advance," often 70-85% of the purchase price of the accounts, with
the balance of the purchase price being paid, net of the factor's discount fee
(commission) and other charges, upon collection from the account client. In
"maturity" factoring, the factor makes no advance on the purchased
accounts; rather, the purchase price is paid on or about the average maturity
date of the accounts being purchased in the batch.
Factoring differs from a
bank loan in several ways. The emphasis is on the value of the receivables
(essentially a financial asset), whereas a bank focuses more on the value of the
borrower's total assets, and often also considers, in underwriting the loan,
the value attributable to non-accounts collateral owned by the borrower. Such
collateral includes inventory, equipment, and real property. That is, a bank loan issuer looks beyond the
credit-worthiness of the firm's accounts receivables and of the account debtors
(obligors) thereon. Secondly, factoring is not a loan – it is the purchase of
a financial asset (the receivable). Third, a non-recourse factor assumes the
"credit risk", that a purchased account will not collect due solely
to the financial inability of account debtor to pay. In the United States, if
the factor does not assume credit risk on the purchased accounts, in most cases
a court will re-characterize the transaction as a secured loan. Factoring can be an
effective financing mechanism for companies that need to fuel surging
growth in
the early stages of business development and beyond. If your
receivables are growing rapidly, consider factoring them for immediate
cash. Contact us today to see how factoring just might be the right tool to finance your growing receivables.
"We make a living with what we get, but we make a life with what we give." Winston Churchill
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