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About Factoring"Factoring" is the process of purchasing accounts receivable invoices from small business to improve their cash flow, allow for continued and stable growth, and improve business efficiency by creating more positive time for owners to manage their companies. Factoring is not a loan, but rather the discounted sale of an asset for immediate cash. Invoices are purchased based on the "credit worthiness" of the payer, as opposed to the more conventional lending method of evaluating the credit and security of the client. Factoring may appear in various forms and may not always be recognized. On the other hand, it may be the most frequently used service in the financial world. When a credit card is used to conduct a personal transaction, factoring has occurred. The credit card company guarantees immediate payment to the merchant for the goods and services provided, but for a reduced amount, retaining the difference or "factoring fee" as their profit margin. Many industries might encounter the need to consider factoring. An example of where factoring may apply could be auto body shops who frequently wait several weeks after the repair work has been completed before receiving payment from insurance companies. In such cases, factoring companies pay the shop a discounted value for its invoice immediately upon completion of the work, earning a profit when payment is made directly by the insurance company. The banking industry appears generally insensitive to, or uninterested in, the needs of small business. Extension of credit is generally based on balance sheet lending, relying primarily on retained earnings, support by other "real" security and the usual personal guarantees. As a result, new unproven companies, in particulate those growing quickly, find credit difficult to obtain. Banks continue to seek larger and more established clients, leaving a significant void in the small business community. These smaller operations frequently fail. Their inability to collect receivables in a timely manner may restrict their ability to process new orders for products or services. In many instances, suppliers insist on COD, or offer only seven to fourteen day terms for payment of accounts. On the other hand, it is not unusual for larger corporations to delay payment for up to several weeks. This delay can cause difficulty in accepting new orders, meeting payroll, purchasing additional materials and supplies, paying operating costs or credit accounts, etc. Large companies are often in a position to take unfair advantage of the small operator's need for timely cash, offering immediate payment in exchange for substantial discounts. These discounts can be so large that profit margins are severely challenged. Without adequate and consistent cash flow, the ability of a small business to compete can be seriously impaired. Cash flow management is usually the primary reason for a business to choose factoring. However, it is not the only one. In fact, numerous explanations exist for the success of this rapidly expanding and re-emerging industry.
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