Business Factoring

In the world of corporate finance, there are many terms that are completely unknown to outsiders who do not operate in this exclusive realm. One of these terms is Factoring. Business Factoring refers to the process of when a company decides to sell all of the receivable accounts that remain unpaid to another company. The other company is known as the factor and offers a lower rate than the true value of the accounts that are receivable. The reason that a company would want to use Factoring as a strategy is that it allows an immediate injunction of cash that can be used at once instead of needing to wait for accounts to pay their invoices to have the money on hand.

There are many differences between Business Factoring and a typical loan from a bank. Firstly, the credit risk of the selling company is never in question as they have no responsibility in the Factoring deal. The money that needs to be paid, hence the risk, comes from the other companies or individuals that owe amounts to the selling company. When the third party company buys the Factoring accounts, it assumes the risk that the companies that owe may or may not pay. This is the reason that less than face value is paid for the Factoring accounts. Essentially, what is being sold is the risk of payment from the Factoring accounts. If the third party company believes that there is a greater chance of the accounts paying than the percentage that they have to pay for the accounts, then the Factoring becomes an advantageous deal.

With a large company, income can come from many different sources. As such, it may not arrive in time and may not be able to be used for the equally big expenses of the large company. This form of Business Factoring is a way that a company can avoid being late with payments because their own invoices have not been paid. When a company is late to pay a large bill, the interest charges for overdue balances can quickly add up to substantial sums. Rather than wait until their invoices are paid, the company may decide that the Business Factoring actually will save money for the firm. In this manner, they do lose some money in the sale of the Factoring accounts, but they will not have to pay late fees because the money is available to pay on time.

While not usually known as Factoring, the same process exists outside of Business Factoring deals. Banks and other loan institutions regularly practice this action when they believe the chances a loan will be paid back are low. They usually sell the loan to another bank, but the invoices can also be sold to investment firms. For both the seller and buyer, the Factoring process could be beneficial. The bank no longer must carry the risky debt and the buyer can have significant financial profit due to the low price of buying the debt.