Factoring is a business practice that can be a benefit to both the factor and the business owner of invoices. Since invoices represent income, i.e. assets to a business, they can be purchased by a factor who would then assume all risks involved with collection of the those invoices. The debtor who must pay the invoice is unaffected by the transaction, owing the full amount to someone in either case.
The benefit to the factor is that it acquires a number of invoices which must be paid in full by debtors, and also receives a fee from the business owner for the service. While this may not seem substantial, the cumulative profit realized on a large number of such invoices for a large number of businesses can be quite significant, which of course is why the factor offers the service in the first place.
For a business owner, the benefits can be even more of a boon. Granted, it must pay a fee for the factoring service, but the real beauty of the transaction is that a business can be paid for invoices as quickly as a single day following the actual invoicing of a customer. This can have a dramatic effect on cash flow, especially for a start-up business which is often cash-poor and desperate to receive income quickly.
Because the payment of invoices by clients can be 30, 60, or 90 days after the initial invoicing – and sometimes even longer than that – a significant portion of a given company’s assets can be tied up in unpaid invoices at any point in time. By selling those invoices to a factor and being paid a portion of the full invoice amount immediately, start-up companies can readily inject cash into their business without delay and use that cash for any number of purposes to advance the business.
In a scenario like this, the business selling the invoices is also freed from the necessity of sending invoice reminders to non-paying clients, and continuing with endless follow-ups. The entire responsibility for collection will have shifted to the factor, and the start-up company is better able to get on its feet.