business service

Factoring is a time-sensitive and need based means of financing a company until being able to qualify for more conventional financing. Most bank loans require collateral including equipment and accounts receivable. Factoring usually only requires a first collateral position on the accounts receivable. However, they do require to be in a first collateral position on the accounts receivable.

When companies have loans at the bank, sometimes it becomes necessary to ask the bank to subordinate liens on the accounts receivable in order for the company to be eligible for accounts receivable financing.

Factoring is a time sensitive way of accessing assets in the form of accounts receivable to improve the company's cash flow. Rather than facing periodic payments, the company is actually able to grow and flourish with additional funding automatically as the company grows. As the company grows and the cash flow situation improves, and credit of the company improves, the business is able to obtain less expensive conventional financing. Some very successful fortune-500 companies have used factoring in the process of development. The time when factoring is most beneficial is when a company is growing. Often, companies will offer an early pay incentive such as a ten percent discount if paid within ten days. Some of the cost of factoring can be offset by discontinuing those early pay incentive. Other offsets can be through taking advantage of suppliers who offer such discounts.

Conventional financing has become more difficult for small to medium size businesses due to tightening of credit restrictions at the banks. Some of the small and medium businesses still have a line of credit but it is not large enough combined with realization of accounts receivable to meet operational needs. Invoice factoring is a way to shorten the gap between the time an invoice is submitted and when it is actually paid.

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