Although factoring has been around for thousands of years, its popularity has risen recently, with more than $3 trillion in accounts receivable being factored in 2013 alone, a large increase from a few years ago.
WHAT IS FACTORING?
Factoring is technically not a loan and is sometimes referred to as a “lockbox” at banks that offer the service. It’s the preferred method of financing in the textile industry and can be useful for any businesses that don’t have other assets to offer as collateral and need capital quickly.
A “factor” is a third party that purchases part or all of a company’s accounts receivables in exchange for a percentage of the invoice. The “factor” then owns the outstanding invoices and collects from the customers. The factor earns a profit from the difference between the discounted rate negotiated to buy the account receivables, and the full invoice amount collected from the customer.
HOW FACTORING WORKS
Interested business owners can contact a factor (there are several independent factoring companies, searchable via the
(Commercial Finance Association) or any bank that offers the service. From there, you can research a variety of factors and choose the one that is the best fit for your situation.