Spot Factoring: What It Is and How It Works?
Factoring financing has been around as a business technique for a long time. In basic terms, it is a transfer of risk. Although many financial experts will use the term factor financing synonymously with accounts receivable financing, factoring is different in that it actually transfers ownership of those accounts receivable. With accounts receivable, there is no ownership transfer, only risk transfer. The “Factor” refers to the third party that is purchasing the risk—in these cases, the accounts receivable. Factoring allows a business to ensure consistent cash flow when needed and allows them to keep less cash on hand at any given time.
Factoring is a corporate finance technique that enables a company to either:
- Transfer the credit risk of its accounts receivable to a third party and / or;
- Leverage its accounts receivable to accelerate its working capital through the sale of its accounts receivable to a third party.
Through factoring, you can allow clients to pay with credit rather than cash up front, without hindering your business in the meantime. Even though the client pays with credit, through factoring you have cash flow right away because that credit risk is now transferred the buyer.