Factoring companies advance cash to companies that have a legitimate pool of business to business accounts receivable. The product or service sold must have already been completely performed, accepted by the customer as satisfactory, and invoiced to them. Until the customer agrees that the invoice is acceptable and will be paid, the factoring company cannot advance funds on it.
Invoice factoring is a great way to enhance and strengthen a firm's working capital position. But it needs to be understood what this type of financing cannot accomplish:
- Factors won't advance funds on future services or products to be shipped in the future.
- Start-up capital for a company with a new contract that needs funds for production. This type of situation would likely need purchase order funding.
- The factoring relationship can't finance equipment, inventory, or real estate. Funds derived from advances can be used for any purpose, but factors don't provide direct financing for those assets.
- Sales professionals can't use factoring to receive advances on commissions.
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