A Simple Breakdown of Factoring

Often times, businesses get into a situation where a great deal of their operating capital is tied up in outstanding invoices. These yet-to-be-paid invoices can weigh heavily upon a business and, in many cases, it can cause a business to close prematurely, even if they are doing brisk business. To avoid this from happening, many businesses use factoring. Factoring is an extremely beneficial way of getting the operational cash a business needs while it’s waiting on slow to pay customers to repay the business for outstanding invoices.

Factoring is an extremely easy process. This is when businesses that have outstanding invoices leverage those invoices for operational capital. In essence, they are borrowing money against outstanding invoices. Many times, the factor may loan anywhere from 70% to 90% of the total outstanding invoices, plus any fees and interest. Once the invoice is paid, the business will pay back the factor the money that was borrowed and any interest and fees that have accrued.

In the event that the invoice isn’t paid, the factor can pursue the business that it loaned the money to for repayment. This is considered standard factoring. However, with non-recourse factoring, the factor takes on more responsibility and more risk. In these instances, the factor actually takes possession of the invoices. They will also take over in the responsibilities of collecting on that invoice. This may seem too risky, but, in non-recourse factoring, factoring insurance is purchased by the factor. To pay for this, higher interest rates and fees are charged. This means that if the invoice is never be paid, the factor can still get the compensation that they need to make it a financially beneficial transaction.

If your business is suffering from slow to pay customers and you don’t have the money to pay your employees or purchase more inventory to produce more products and services, factoring may be the perfect solution. In fact, it is commonplace in both small and large businesses. That’s why if your business is cash poor, you may want to consider factoring as an option. To see more about the benefits of factoring and to learn more about the terms of this financial transaction, you can check out more information online.