Factoring is a great way for companies to access money tied up in their invoices, offering them a cash flow that can help sustain a business. Factoring is a process by which one company sells off its outstanding invoices to another, for less than their face value.
Naturally, this process is beneficial to both the buyer and the seller. The buyer can acquire invoices for less than their face value. The seller manages to sell off outstanding invoices and gets to convert the same to positive cash flow, even though it’s at a lesser value. The entity that bought the invoices is known as the factor and the process is called “factoring” or “invoice discounting”.
Think about it, you have a company that’s strapped for cash and loads of outstanding invoices. Given that situation, factoring may be the viable option for you. It allows you to “cash in” and at the same time, provides you with the option of ready cash when none existed before.
Yeah, your invoices may get devalued a bit, but you do not have to run after the debtor any longer. The responsibility has been transferred to the factor and you can concentrate on running your business.
Once the factor takes over the invoice, the debtor has to settle the debt with him or her.
Factoring is a great way to extract money out of your unpaid invoices, especially if you happen to be in the middle of a cash crunch!