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Many businesses are challenged by maintaining enough cash to carry on normal business activities. This can be a particularly serious issues for small or new businesses. Factoring is one possible method for obtaining cash. Let’s take a look at this and the services provided by factoring companies.

If you as a business owner make a factoring deal, there will be three parties. Suppose you sold a couch to Nancy for $700 but she doesn’t pay right away. You could sell the right to collect for the couch to Phil’s Factoring for $650. Phil will give you $650 very quickly and then collect $700 from Nancy. You don’t get quite as much money but you get it faster. Phil makes $50 for the extra trouble and risk and possibly some interest.

Another way of describing the above transaction would be to say that Ace sold the Bill’s Bakery invoice to Fred’s Factoring. Thus, Bill’s would pay Fred’s instead of Ace. It is a normal practice for the debtor to be notified when the debt is sold. Whether the seller or the factoring company is responsible for this is negotiable.

Factoring has been around for a long time. Early forms of it were present in England by about 1400. It can be seen as the beginning of merchant banking. In some cases factoring companies have taken on involvement in both the sales and the delivery of merchandise. This would make them more like distributors.

Factoring tends to be more expensive than acquiring a loan that used the same receivables as collateral, but since it does not rely on the credit worthiness of the company selling the receivables, factoring may be available in cases where loans are not. At times the use of factoring has carried negative connotations, suggesting that a company that sold its receivables might be in desperate conditions. This is not necessarily the case, and in most situations there is little or no stigma.

What happens if an invoice is not paid? The answer depends on the type of factoring agreement. With a no recourse agreement, this is the factoring company’s problem. If the agreement was for recourse, then the factoring company can request reimbursement for unpaid invoices. No recourse factoring is more expensive because the factoring company assumes more risk. If the likelihood of debtors to repay is unknown, then only recourse factoring may be available.

So how do you get started in factoring? Establishing a good relationship with a factoring company is almost like starting a good banking relationship. Finding the right factoring company may require some work. It’s easy to get names, but knowing which ones would be good to use can be complicated. Interviewing references from candidate companies could be useful.

So, should you engage in factoring to raise money? There is no universal yes or no answer to this. You need to look at the specifics of your business today and analyze alternative ways of raising money. You may well find that factoring could be good for your business.

Factoring Companies canprovide faster service & process invoices sometimes within 24 hours. services), then forwards the remainder to you immediately. And they have two basic requirements for qualifying for their alternative form of financing. Cashflow Finance