Simply put, factoring wants to say; pre-financing invoices. For companies that require cash flow, factoring can offer a solution for various reasons. As an example, it allows companies to hand over their credit management to a factoring company. This reduces the need for companies to hire debtors. In addition, factoring gives direct access to the money that is outstanding in invoices from clients without waiting for the payment term of 30, 60 or sometimes 90 days.

Factoring differs in different ways from bank loans and other forms of financing. One of the main differences is that factoring can be used as a means to get invoices in a quick way, often within a day or two after sending the invoice. Another difference is that factoring, unlike a loan, is not based on the creditworthiness of the companies that want to cooperate with factoring companies.

The most common reasons that companies use and benefit from factoring

Fast-growing companies can quickly receive the money needed for expansion. If companies make rapid growth, they often have to deal with cash flow problems as a result of (too) long payment terms. This can create problems within a company, because instead of keeping the focus on growth and success, the company has to look for ways to bridge the payment terms for invoices. Companies that are in such a scenario are not able to realize further growth, because they have to wait until customers pay their bills. However, if companies sell the invoices to a factoring company, they get quick access to cash to maintain the focus on growth.

It can be difficult for new companies to obtain a loan. In many cases, banks do not give credit or financing to new or starting companies. Factoring companies can offer a solution for these companies.

Seasonal companies may have a challenge to obtain loans. Companies that are only operational during certain months of the year often have trouble getting a loan. Loans are usually offered to companies that can show a consistent and positive cash flow.

Factoring can be used to survive unexpected situations. Even though it is an unpleasant thought, sometimes situations arise whereby companies unexpectedly end up in financially heavy weather. In such cases, factoring firms can offer a solution by offering temporary factoring and helping the company through a difficult period.

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