If your business needs to raise cash in a hurry, business factoring may be a process that is helpful to you. In this process, you will sell your invoices at discount to a third party, a factor, in order to raise cash so that you can continue in business.

Factoring is different from a bank loan, but it also does provide immediate cash. Factoring is based on the value of the invoices and not on the business’s credit worthiness. Factoring is not though of as being a loan but a purchase of some financial assets from the company. A bank loan only involves two parties while factoring involves three.

Factoring is not the same as forfaiting. Forfaiting is a process whereby a business sells a lone transaction. With factoring, the entirety of the business’s receivables are sold. With forfaiting, the process is considered transaction based while factoring is a firm based one.

Sometimes factoring is confused with invoice discounting. Invoice discounting involves borrowing money using the accounts receivable as collateral while factoring is actually selling those accounts.

In factoring there are three parties involved: the business that sells the accounts, the factor and the debtor.

A debtor is a person owing money to a business that will be selling the account. The debt he owes is normally due to goods that were sold or service preformed for the debtor.

The seller or business sells the accounts receivable to the factor at a discounted rate to obtain needed capitol for operation. When they purchase the receivables, the factor has all rights and risks that are commonly associated with accounts receivable. If the debtor does not pay the debt owed, the factor has to bear the loss. The wise factor will take the risk into account and be sure that even if a debtor does not pay that he still makes a profit.

When accounts are sold to a third party, the debtor normally receives a notification. Billing should come directly from the factor and not from the seller. Once a business sells its accounts, it is vitally important that they no longer collect the debtor’s payment. To do so will affect any more advances that the factor may make.

When a business makes a factoring transaction, they receive an advance of a certain percentage of the face value of the invoices. The advance is made using a mutually agreed percentage. Both the seller and factor agree on this amount. After the invoice is paid in full, the reserve amount or remainder of the invoice less any fee due the factor is paid to the seller by the factor.

The factor’s fee can include service charges and interest based on the amount of time the factor had to hold the account to receive the payment from the debtor.

Business factoring has little effect on the debtor. The only major difference for him is to whom he writes his payment. It does make a big difference for a company that is strapped for cash to meet current obligations. Factoring can give them the needed cash to continue in business. For the factor, factoring is a way of making profit. His profit is the difference between the price he paid for the invoices and the money that cam back from the debtor. His loss will be the invoices not paid.

Factoring business is a process that allows a business to sell its accounts receivable to a factor. We have got the best inside skinny on factoring companies .