Business factoring is an ages-old commercial accounting and collections model that's still quite common in some industries today, most particularly within industries which have long receivable collection cycles. Because of the amount of time it typically takes to collect on an invoice, which can be 60 to 90 days or more, the companies elect to use factoring for cash flow purposes.
These same companies generally do not have much or any credit history for their corporate entities. This makes getting a traditional business loan nearly impossible as lender requirements include having a long and robust and near-perfect credit file for applicant businesses.
While a business might have a sound cash flow stream and its book of business robust, lenders rely heavily on credit scoring and not on said book of business. This is one reason alternative lenders are a preferred choice for businesses using the factoring system.
The Basics of Business Factoring
Business factoring, simply put, is selling a acting invoice to another party for that party to collect from the end client or customer. The factor, or entity which purchases the invoice from the business which created the invoice, pays a discount which is deducted from the face value.
For instance, if your business delivered a product or completed a service, and you created an invoice for that same product or service, but would have to wait a long period of time to collect on your invoice, you would sell that very invoice to a factor for a discount of 2 percent to 6 percent. The client customer who purchased your invoice would then collect on the face value of said invoice from another party.
How to Get Business Factoring Quick
Although there is a common perception that business factoring is an expensive form of financing, it is actually one of the most economical and timely types of business collections and funding. As stated above, businesses using the factoring system generally do not have much or any type of commercial credit for lenders to evaluate. Therefore, traditional lenders, would charge a premium interest rate, along with a substantial collateral roll requirement, in order to a commercial loan.
Fast Business Factoring Fast
Since traditional lenders do not approve loans without credit verification, collateral, and certified financial documentation, businesses which rely on the factoring system find alternative lenders to be the best choice for their commercial funding needs. Unlike big banks, or even regional banks and credit unions, alternative lenders are able to make commercial capital available to businesses based on their monthly sales, not their credit scores, or, assets and liabilities.
Business Factoring Rates
In addition to these key advantages is the fact that alternative lender rates are highly competitive. What's more common their payment model is based on a percentage rather than a fixed sum. This means during slow sales months, payments automatically decrease and this is why alternative lenders are a prime source to acquire business equipment fast. Applicant businesses need only complete a short and simple online form to be approved in as little as 24 hours, with funds directly deposited in under a week, ranging from $5,000 to $500,000.
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