What is a Factoring Company?

What is a factoring company? It is a credit lender that buys accounts receivable invoices, providing clients like you with cash flow relief in good and bad economic times.

The concept of an advance on a due payment has been around for a very long time. In the personal finance world, one sees advances on paychecks as a frequent option for employees although such services are very expensive. Factoring is the equivalent in the world of business, but is a much cheaper form of financing.

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Businesses commonly run into cash flow issues that one does not see in personal finance. The problem arises with invoice payments. A client may order $50,000 in products from a business, but they only have to pay within 30 days of receipt of the products. The business knows money is coming, but it has problems meeting its bills and payroll until the money comes. This is known as a cash flow problem.

If a business cannot cover things financially during this time gap, it can approach a factoring company about financing. The factoring company will review the invoices and then issues terms on financing. If the company accepts, the factoring company will issue a wire transfer or check to the company for 70 to 80 percent of the total invoice value. It will then pay the remaining percentage minus fees when the invoice is paid by the client of the company. This is factoring in a nutshell. The massive advantage to factoring is the entire process takes only a few days.

Who exactly makes up the factoring company? Often, it is an arm of a larger financial institution much like you see with investment brokerages. Less often a factoring company will be created by wealthy investors.

What is a factoring company? It is a financial institution that buys business invoices. Companies usually pursue factoring financing to cover cash flow problems.