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Also known as financial factoring or simply factoring, finance factoring is a funding strategy that makes is possible for companies to obtain cash from certain assets sooner rather than later. The process essentially calls for an investor to buy one or more assets from the client and provide payment that amounts to an agreed-upon percentage of the value of those assets. In many instances, an additional disbursement is made later in the process, with the investor keeping a small percentage of the total value of the assets as the means of making a profit.
One of the more common examples of finance factoring is known as invoice factoring. With this arrangement, a client sells the accounts receivables for a billing period to a factoring company. The company assesses the invoices and remits a payment that amounts to anywhere from 70% to 90% of the face value of those invoices to the client. In return, the client directs his or her customers to send payments on those invoices directly to the factoring company, often to a lockbox address provided by the factoring agent. Once the invoices are paid in full, the remaining value of the invoices is paid to the client, less a fee that amounts to anywhere from three to five percent of the face value, with that fee constituting the profit that the factoring company makes from the venture.
Depending on the actual arrangement between client and factoring agent, the finance factoring may be a short-term financing strategy that lasts for no more than a few billing periods. At other times, the working relationship between the two entities may continue for a number of years. Typically, the terms of the arrangement will allow either party to terminate the working relationship if and when it no longer serves their best interests. Clients can buy back any outstanding invoices currently in the possession of the factoring company and end the relationship, while the factoring agent may choose to end the relationship if it becomes apparent that the client is not fulfilling all the terms of the working agreement.
Finance factoring may be used by a company for several reasons. In some cases, this approach makes it possible to secure funds in advance in order to finance a new project. At other times, the finance factoring is done as a means of helping a company that has gone through difficult financial times to continue recovering by making funds available sooner rather than later. At its best, this type of financing arrangement can be mutually beneficial and eventually help the client become fiscally stronger. Since terms and conditions can vary from one factoring provider to the next, comparing terms and programs before making a selection is extremely important.