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Factoring Can Be A Perfect Remedy For New And Expanding Businesses
Factoring is among the oldest methods of business financing around the world. The history of factoring dates back to the times of moneylenders in the middle ages.
Factoring has been the operating capital facility of choice in Europe for thousands of years. It has taken on a new life in recent years as a financing method for lots of businesses within the United States.
Factoring is the sale of accounts receivable, in contrast to borrowing against them as you would do with a bank loan. By selling your invoices, you produce instant cash flow rather than having to wait for your customers to pay.
Businesses often find themselves in the frustrating place of having sales opportunities which they cannot accept mainly because of the lack of financing to guide those sales.
Some companies use equity capital markets to build financial capital. Other people use business merger methods to expand their companies. A business merge can be tricky if you do not have accurate information from a good financial consultant.
Banks normally can't provide adequate funding for growth on account of internal credit policies as well as external regulatory restraints. Even when a business can qualify, the bank line of credit may be entirely inadequate to support the company's sales growth opportunity.
Main advantages of factoring versus a bank line of credit:
- Factoring facilities are significantly easier to implement in comparison with acquiring a bank loan.
- Factors have a lot more flexibility with regard to documentation and credit issues than banks.
- Factoring could be initiated and terminated very efficiently. When producing a first-time purchase of invoices from a business, factors commonly take one to two weeks to determine the credit ratings of the clients and communicate a discount price.
- The company receives payment in cash from the factoring company after delivery and invoicing a customer. Instant invoice payment eliminates the sale-to-collection business cycle; therefore allowing companies caught in a cash crunch to acquire quick relief. Turnaround on the sale of receivables is approximately 24 hours.
- Factoring is a sale of assets (invoices), not a loan. For businesses that either can't qualify for traditional debt financing or that simply don't want to incur more debt; factoring is a very good alternative way of funding working capital.
- Factors acquire all rights in the invoices as well as the seller has secondary liability for any invoices not collected.
The factors undertake debt collection, but the business remains ultimately responsible to pay off any portion of the cash price attributable to an account that went uncollected. Factoring may be an effective solution to funding a short term gap in revenue for the start-up or rapidly expanding businesses.
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