What is factoring?
Factoring is a financial transaction whereby a business sells its invoices to a third party (called a factor) at a discount.
The factor provides financing to the seller of the invoices in the form of a cash ‘advance’, often 70-80% of the invoice face values. The balance of the purchase price is paid upon collection, net of the factor’s discount fee (commission) and other charges.
The emphasis is on the value of the invoice which is essentially a financial asset. The business (the seller of invoices) is borrowing against its debtors.
Many businesses use it to regulate their cashflow and to prevent problems caused by late paying customers. Factoring is an option for small businesses that do not have time or resources to chase up payment on unpaid invoices.
The benefits of factoring to small business are:
- Immediate cashflow improvement.
- An end to bank fees incurred from your late paying customers.
- Obtain immediate cash on delivery from your sales.
- Allows you to save time by being able to focus on operating your business and not chasing unpaid invoices.