Factoring is basically selling your accounts receivable to another company at a discount so you can get cash immediately. For some companies, this makes good business sense, since there are some customers that do not pay on time, while others don’t pay at all.
Another advantage of using a factoring company is that it helps provide needed financing. Sometimes, new companies have a hard time getting loans because there is a lack of established longevity. By using factoring services, the company gets immediate cash flow, which yields the same results as a loan.
Even the best-run businesses can run into cash flow problems. When cash flow is tight, a factoring company can provide much needed cash quickly.
Most customers are good companies that want to pay their invoices. At certain times however, the same companies do not pay because they have a tight cash flow (hence they will pay late), or there is an issue with the paperwork on their end. Using factoring services can help to deal with the headaches of invoice collection.
Although largely unknown, the factoring industry is quite large, and has been used as a financial service by multi-billion dollar corporations for many years. Only over the last several years has this service been made available to small and medium sized business as an alternative to traditional bank financing, which generally requires at least two years in business with a profit, leinable assets and personal guarantees.
Brian Solomon is a Web Editor for TMCnet, covering news in the IP communications, call center and customer relationship management industries. To see more of his articles, please visit Brian Solomon’s columnist page.
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