What is Factoring (Accounts Receivable Financing)?
The Short Answer
Factoring (Accounts Receivable Financing) explained simply
Factoring is a way for businesses to get cash quickly by selling their unpaid customer invoices to another company, called a "factor." Instead of waiting 30, 60, or 90 days for customers to pay, the business gets a large portion of the invoice value upfront from the factor. The factor then takes on the responsibility of collecting the payment from the customer. Once the customer pays, the factor gives the remaining balance to the business, minus their fees.
Real-World Example
The Construction Company Scenario
Imagine a construction company that just finished a big project. They sent an invoice for $100,000 to their client, but the client won't pay for 60 days. The construction company needs cash now to pay its workers and buy materials for the next project. They decide to use factoring. A factor agrees to buy the $100,000 invoice for $95,000. The construction company gets $95,000 immediately. When the client pays the factor the full $100,000 in 60 days, the factor keeps the $5,000 difference as their fee.
Why this matters
Factoring helps businesses with cash flow problems. It allows them to access money tied up in unpaid invoices without waiting for customers to pay. This can be crucial for growth, covering operating costs, or taking on new projects when traditional loans aren't an option.
Factoring can be a good short-term solution for cash flow, but understand the fees. It's often more expensive than a traditional loan, so weigh the cost against your immediate need for cash.
Factoring can be a good short-term solution for cash flow, but understand the fees. It's often more expensive than a traditional loan, so weigh the cost against your immediate need for cash.
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