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Article:
Factoring. Cash Without Borrowing by: Fred Coutts Cash flow is one of the main reasons businesses fail. At one time or another, every business, even successful ones, have experienced poor cash flow. Cash flow does not have to be a problem any more. Do not be fooled -- banks are not the only places you can get funding. Other solutions are available and you do not have to borrow. What is Factoring? One solution is called factoring. Factoring is the process of selling accounts receivable to an investor rather than waiting to collect the money from the customer. Oh, the Irony'¦ Factoring has an ironic distinction: It is the financial backbone of many of America's most successful businesses. Why is this ironic? Because factoring is not taught in business colleges, is seldom mentioned in business plans and is relatively unknown to the majority of American business people. Yet it is a financial process that frees up billions of dollars every year, enabling thousands of businesses to grow and prosper. Factoring has been around for thousands of years. Factors are investors who pay cash for the right to receive the future payments on your invoices. An unpaid receivable or invoice has value. It is a debt your customer has agreed to pay in the near future. Factoring Principals Although factoring deals exclusively with business-to-business transactions, a large percentage of the retail business uses a factoring principal. MasterCard, Visa, and American Express all use a form of factoring in their retail transactions. Using the purest definition of the word, these large consumer finance companies are really just large factors of consumer paper. Think about it: You make a purchase at Sears and charge it to your MasterCard. The store gets paid almost immediately, even though you do not make payment until you are ready. For this service, the credit card company charges Sears a fee (typical fees range from two to four percent of the sale). The Benefits Factoring can offer many benefits to cash-hungry companies. Rather than wait '30
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