Factoring: Is it a Loan?

If you aren’t aware of what factoring is, it may seem to be quite like a loan, but do not be deceived. Factoring is the practice in which a business will sell their accounts receivable so they are able to continue business. This is helpful when a business performs a service for another business that has a long hold time on their invoices, causing the business to wait a great deal of time to receive all their payments due. When that occurs, it can deplete the business’s operating budget as they have done the work, but haven’t been paid, causing the business to need shorthand cash for venture capital or any investments that may come up.

Instead of waiting until they have no budget, the business will do what is called accounts receivable factoring, or invoice factoring, allowing them to get the funds they need. They will sell their accounts receivable to a third party, allowing that third party to collect the monies and only pay the business a discounted price. This is extremely beneficial to businesses as they must have an operating budget and revenue that is in balance for the business to be able to operate continuously and efficiently.

So, no, factoring is not a loan. Though it is sort of like getting a loan, the business is really selling their assets for the third party to collect on, giving the business the operating revenue they need when their customers are holding the invoice for an exceptionally long time. Invoice factoring prevents the need for a loan, allowing the business to prevent any further costs incurred due to the invoice holding of their customers. Accounts receivable factoring is a practice that is quite commonly used in order to collect debts in a timely manner without strain on the business’s finances.

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