Baltimore, MD -- (SBWire) -- 01/18/2011 -- Factoring is Different From a Bank Loan in Raising Cash By Eve Garcia. Companies can sell their invoices to raise cash rather than go down the bank loan route.
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More organizations and companies are selling invoices to a third party as a means of raising funds.
The financial process known as factoring is where a business sells its accounts receivable - its invoices - to a third party for immediate payment but receives less in return than the value of those invoices.
This system is usually used by a company when its available cash balance is not sufficient to meet its existing commitments or other cash needs such as fresh orders or contracts. It allows the business to maintain a smaller ongoing cash balance, though by selling the invoices for a lower amount than they are actually for.
The invoice is sold to a third party called a factor, and this is where the approach is different from a bank loan when it comes to a business looking to raise funds.
Shaw Capital Management and Financing - Factors make money available even in circumstances where a bank may be less willing to do so.
This is primarily because they are more concerned with the creditworthiness of the debtor - the business or organisation that is required to pay the invoices for the goods or the services delivered by the invoice seller.
In contrast, banks tend to focus more on the creditworthiness of the borrower when looking to lend.
Factoring is seen as a calculated risk by many firms and one they enter into for a specific reason.
The down side is that they are offloading their invoices for less than their face value, but the return is that they are getting the money owed to them much more quickly than they would have done if they had simply pursued the buyer of their goods direct.
A number of companies operate specifically in the factoring and invoice discounting business and actively contact companies and organizations that they believe will benefit from such services.
These firms look to promote a number of benefits of the services they offer to the invoice seller. They suggest that the process is a way to get access to money quickly and safely and that it also avoids the difficulties and inconveniences that can be involved in collecting bad debt.
It is also promoted to potential customer firms as helping to facilitate and smooth out cash flow and as a way of borrowing money that is secured by their debt.
Once the factoring business takes on the invoice and the debt, it has the responsibility of collecting payment. It makes its profit by paying the invoice seller less cash than the face value of the invoice.
It is worth "shopping around" when looking to engage the services of a such a firm, since the market is competitive, with estimates suggesting that in the UK alone it is worth in the region of £200 billion a year, and fees vary.
There are a variety of reasons for this, with a significant fact being the risk associated with the invoices that are purchased.
Before taking on the invoice, the factor will conduct various levels of research. This will include looking into the track record of the debtor firm to assess whether it is creditworthy or has a history of bad payment. Once taken on, the factor will then seek payment from the debtor.
Factoring is used across a wide spectrum of business organisations and more recently the practice - which has a history stretching back to the 14th century in England - has been adopted by government bodies.
Today in the UK, factoring is used in some form by around 50,000 companies as a means of releasing finance.
Shaw Capital Factoring VS Bank Loan