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Understanding Business Receivable Factoring

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Understanding Business Receivable Factoring

Business factoring is not new. In fact, it is one of the oldest ways for businesses to take advantage of the funds they have coming to them through invoices with 30, 60 or 90-day terms.

In a very simple nutshell, business receivable factoring allows a third-party, the factor, to “buy” accounts receivable from a business. The factor then provides the business with funding for up to or more than 80% of the value of those invoices.

At the same time, the factor assumes the management of the invoices purchased. Of the 20% holding, the factor deducts his or her fee for the service, usually less than 5% plus any fees, and then returns any remaining to the business from the 20% holding.

Your Benefits

As a business owner, taking advantage of business receivable factoring allows you to have immediate cash instead of waiting for one to three months for your customer to pay.

This is not a loan as it is money that is owed to you, which the factor is paying immediately. Your customer then pays the factor, which also eliminates the need for managing accounts and dealing with trying to collect payments.

At the same time, business receivable factoring allows you to:

  • Use the funds to replace or buy inventory
  • Use the money to pay off suppliers and early payment discounts
  • Hire new employees
  • Buy or rent equipment
  • Complete repairs
  • Make payroll
  • Pay bills
  • Take on new customers immediately
  • Grow your business as opportunity presents itself

The benefits to working with a top factor make this a viable and effective solution for short-term cash flow challenges. It is also a great way to work with a factor over the long term to offload the back-office work of an accounts receivable office, allowing your staff to focus on growth and business expansion.

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