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What is Factoring?

Written by Katie Mullin - 11/04/2014

As an asset-based lender, one of our primary products is factoring. While not mainstream, it’s a very handy and useful financing solution for small- to mid-size companies that are experiencing growth. Factoring is the sale of your accounts receivable or invoices at a small discount to obtain immediate cash.

Factoring gives businesses the ability to ensure growth without diluting equity or incurring debt. Factoring is one of the oldest forms of commercial finance and is used extensively both nationally and internationally. Factoring is NOT a loan. No money is loaned and no interest is paid or earned.

Why factoring?
A main difference between factoring and a bank loan is with factoring, a company uses its customers’ credit strength, not its own as support for funding. With a bank loan, credit is typically based on assets, equity, profitability, cash flow, and liquidity, thereby limiting the amount of funding. Under a factoring facility, available funding is limited only by the amount of a company’s receivables, which allows a company to meet operating demand and provide for future expansion.

How does it work?

It’s simple. First, you issue an invoice. We verify it and then advance you 80-90% of the value. Then, your clients sends the payment directly to us. When we receive payment, we refund you the remaining amount, minus a small fee. It’s that easy!

 

Factoring Diagram

 

To learn how factoring can help your business, contact us today.

About the Author

KMullinKatie Mullin is the marketing director for Hitachi Business Finance. She has 10+ years experience in the B2B marketing and communication space, having worked in economic development and commercial finance. She and is responsible for all marketing and communication initiatives, including advertising, social media, digital media, and public relations. She can be reached at kmullin@hitachibusinessfinance.com.

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