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February 26, 2008

Making Factoring Work for Your Business

By Brian Solomon, TMCnet Web Editor


Factoring refers to a practice whereby you sell your receivables for a discount before they are due. Historically, factoring has been heavily used in some industries, such as the garment industry, and less in others. Today, however, entrepreneurial factoring companies are willing to buy creditworthy receivables from just about any industry.
Factoring is a relatively expensive means of obtaining financing. You are paying for the cost of the capital, the extra risk, including bad debt, and the paperwork factoring requires. If you can finance your business through other sources, particularly the more traditional ones, you will certainly save money.
However, factoring can be a cash bonanza to a growing business, especially one that cannot obtain the necessary capital through traditional borrowing.
Factoring receivable invoices is the sale of an asset: your invoice. The sale of your invoices to a third party--known as a Factor--eliminates the sale-to-collection business cycle of waiting for payment. A factor will purchase your invoices for up to 90% of the total amount. You get your cash now and the factor takes on the risk of collecting the payments from your customers. The creditworthiness of your customers is very important if you want to get a good rate from a factor
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