Factoring is just one of the many methods and types of business finance.  While virtually everyone is familiar with the concept of “getting a business loan,” that is too simplistic.  There are, in fact, many types of business loans, and, in some cases, the method of business finance is not actually a loan.  That is the case with commercial factoring.

In simple terms, factoring or accounts receivable factoring is the sale of the accounts receivable of a business (invoices) at a slight discount to a finance company, known as the factor.  Factoring is commonly employed by businesses that sell B2B and grant extended terms of payment to their customers for goods or services provided, allowing those customers to delay payment upon invoices for 30, 45, 60 days, or sometimes even longer.  Factoring is probably the oldest form of commercial finance known to man and is employed as a popular business finance strategy in almost every corner of the globe.

It is important to keep in mind as you develop your knowledge of this powerful financial tool, factoring differs dramatically from most other forms of commercial finance in that true factoring is never in the form of a loan. 

Factoring is actually a purchase and sale transaction.  Factors actually buy the accounts receivable of the business they are financing, a trait that sometimes gives factors certain funding advantages over more common commercial lenders.

Growing a Business Through Factoring

For entrepreneurs in the early stages of developing their businesses, factoring represents one of the most powerful financial tools available.  Factoring…

• is available to businesses in the earliest “start-up” stages of operation
• requires little or no credit history for either the business or its owner(s)
• provides a financing facility that automatically increases in size and availability as the client’s business grows
• provides substantial back-office operational support in addition to providing working capital
• allows other business assets to be financed separately from accounts receivable.

Invoices and Terms of Payment

As you will learn as you continue to study this course, most factoring arrangements are sought out to provide a readily accessible method of financing a company’s terms of payment policy and to remedy the cash-flow problems a business often experiences by granting such attractive terms of payment to its customers. At some point in time, as B2B companies grow, they are almost required to initiate a terms of payment policy.  Terms of payment are granted by sellers as an accommodation for a singular purpose…that is to attract more purchases from large (and sometimes not so large) creditworthy customers.

Many large, creditworthy customers, on the other hand, demand terms of payment for a singular purpose…..that is to benefit from the payment delay provided under the terms of payment policy and to allow time to sell products or provide their own services and to generate enough additional cash to subsequently pay their supplier’s invoice within the normal payment terms.