Understanding Factoring

When payroll obligations must be met, vendors must be paid, or unexpected expenses must be covered, it can be difficult for businesses to quickly raise the cash they need.  Factoring is a great way to improve cash flow to address such matters.

Factoring can help businesses of all sizes and across a wide range of industries.  According to Debtor and Invoice Finance Association, factoring turnover in Australia during the September 2014 quarter was $1.2 billion. The industries that utilised the service in that quarter ranged from labour hire markets, manufacturing, transport & storage to retail, construction and mining industries.

What is factoring?

Factoring is a financial transaction in which a business sells its accounts receivable, or invoices, to a third party (usually a commercial factoring company).  Factoring has evolved greatly over the past decade and has become a widely used form of business financing, and is no longer considered a final alternative to struggling businesses or businesses about to go under.

Key reasons to factor your invoices

Why is factoring becoming a popular finance option? There are a significant number of reasons why businesses are utilising factoring. Some main reasons include:-

1. factoring allows a business to have immediate access to money owed on outstanding accounts receivables or invoices;
2. factoring brings in cash without a business taking on additional debt;
3. factoring is a great way to get money right away from slow paying customers or customers with credit terms;
4. factoring is a more flexible form of finance than traditional overdrafts or loans; and
5. factoring is a fast way for businesses to raise cash when a conventional loan is unattainable or time is of the essence.

Factoring has an important part to play in financing options considered by any business seeking to improve cash flow.

It is important when entering into any significant transaction, including factoring, that a business seek competent legal advice to review the documents and ensure their interests are protected.