The easiest way to understand the basic logic of invoice factoring is as follows; whenever you provide a service to your customer or sell them a product and offer them sale terms you are making a loan. If you make the sale and then offer your customer 30 days to make payment, you are loaning them that capital for 30 days – normally interest free. What a great deal – for the customer. When you consider very large companies who insist on net terms have millions of dollars of accounts payable on their balance sheet, that’s millions of dollars of interest free capital. The longer they stretch out their payables the more interest free capital they have to build their companies. So in essence, small business vendors help big companies grow by providing them services they don’t pay for when delivered.
All receivable factoring companies are doing is buying those outstanding loans. The factoring agreement is a Purchase and Sale Agreement whereby you are assigning the proceeds of an invoice to us, the factor. Simply put, you perform the work, you bill the customer, the factoring company pays you for the outstanding loan to your customer and the customer pays their invoice retiring the transaction.
The benefit is, there is no long term liability to you going forward. Many small businesses fail when a long term liability gets called due to changes in the economic climate. Factoring will not leave you out in the cold.