Factoring is an exciting financial procedure that promises to be one of the best short term solutions to any problems your business may have with capital. An honest and business-worth venture, this procedure works best for companies that have clear profits on the horizon and need temporary funding to see the completion of contracted projects. Flexibility and effectiveness are the hallmarks of factoring and the reliability of this procedure in solving capital shortfalls has been proven to be impressive.

Factoring Basics The fundamentals of factoring are incredibly simple, and divided into two main practices. In the first, a factor purchases the asset value of a future receivable; this is also known as a non-recourse factor. The second common practice is to make a loan and use the invoice as collateral (a full-recourse factor).

If this sounds like any other loan operation that functions on the assumption of future profit, you're on the right track. In essence, the underlying business principles that guide factoring are the same as most bank loans, the concept of the credit card, and other such lending practices. Factoring is simply the best tool for a very particular type of situation that necessitates fast capital.

When to Use Factoring and Why Say you've just scored a colossal deal with a new client. All that's required now is for you to provide the products or services up front, but your company is not geared to handle an order of this scale. There simply isn't enough capital.

Time is an issue. Your client is waiting, and regular banks cannot process new loans or financing in time to meet deadlines. It's at this point where most factoring firms step in with an offer.

The main selling point factoring firms offer in order to entice business is speed and flexibility. Moving money through such a firm is much faster and more convenient than the typical loan or refinancing application process at the banks. It basically gives you the time you need to better fulfill client needs and expectations, with much less hassle.

Assuaging Doubts Some businesses fear that soliciting a factoring firm is tantamount to admitting that the company is less credit-worthy than it is. Nothing could be further from the truth. In reality, like any other credit-oriented outfit, no factoring firm would be interested in bad business.

The practice of factoring relies instead on the fact that there are times where companies can unexpectedly encounter a windfall in business that they aren't financially equipped to handle at a particular point. Such moments could be critical for any company, and a factoring firm offers a solution that will help prevent losing accounts not for lack of skills and good products, but a simple lack of present capital. In this, factoring presents itself as a monumental business opportunity for both practices.

Article by N. Tan