Definition of Factoring: When a business sells its invoices (accounts receivable) to a third-party at a discount.
For example, if you, as a business owner, are owed $1,000 from a customer, you may be able to sell this receivable to a factoring company for $980. The factoring company will take a fee, in this case, $20, and you will receive immediate cash flow to continue running your business.
Factoring is a common tool used by businesses to improve cash flow. In particular, new businesses and certain industries are often able to benefit significantly from factoring. The immediate cash flow provided from the third-party can be far more valuable to successfully continue operations than keeping the fees that the factoring company will take to collect your receivables.
To learn more about the fees associated with factoring, we recommend viewing the following article by the Factoring Club, a search engine for factoring companies:
If you are exploring the idea of factoring, there is much more to learn before beginning. We recommend finding a firm you trust and doing your research in advance. For more information and resources, see the following link from the Factoring Club:
Just don’t forget to talk to your CPA before beginning factoring, as it definitely needs to be accounted for correctly in your bookkeeping!