What Factoring Is and What It Isn’t
Factoring is not a loan. You are not paying the factor back, your customer is. Factoring is not a good solution for long term debt like buying a building or equipment. And factoring is not an option for companies in the pre-revenue stage.
Factoring, also known as accounts receivable financing is based on your customers credit strength. Your personal and company credit report is not critical. Accounts receivable financing converts your invoices to cash. First the accounts receivable financing company will research your customers credit reports to establish a credit limit for each customer. Then the factor will establish the validity of your invoices before purchasing them.
Accounts Receivable Factoring Could Be A Great Source of Cash Flow for the Suitable Business
Since the accounts receivable financing company is basing their credit decisions on your customers credit strength and not your credit strength much higher credit limits can be granted. Your customers have probably been in business longer, have bank loans, even be publicly traded; all adding much strength to their credit report.
So, factoring is not right for everyone. But if your company could take advantage of growth opportunities, or is struggling to meet payroll, accounts receivable financing will speed up your cash flow to help your company succeed.