Making a decision for the financial well-being of a company or a business is always a difficult choice. While many businesses may choose the option of business loans or lines of credit, these are often only available to very well established businesses with considerable assets and limited debt.
These options are difficult to obtain for new businesses, startups and smaller businesses. For these companies, as well as the for the larger and more established businesses, factoring of receivables may be a superior choice.
Not a Loan
The big difference with factoring of receivables and a bank loan is that the factor provides upfront funding based on the accounts receivables. The factor actually buys the accounts and then manages the collection from the customer, providing 80% or more of the total value to your business within days. Then, once the customer pays the factor, the factoring fees are deducted from the held amount and the residual forwarded to the business bank account.
As this is not a loan, rather an advance, there is no interest and no repayment for the business provided they choose non-recourse factoring services. Non-recourse factoring means that if the customer fails to pay the factor, the seller (your business) is not required to make good.
The factoring of receivables is also different than using the accounts receivable as some type of collateral. This is commonly seen with a process known as assignment of receivables. With this option your business is still responsible for collecting on the invoice and, should the customer fail to pay, your company will be required to make up the difference to the lender.
There are other alternatives that a business may also consider. These can include merchant accounts or even personal loans by the owner, both which are considered to be much higher risk funding options.