Debt factoring has been a means of fundraising for businesses, especially for small-scale businesses. So, having knowledge of this means something; as it has a lot to contribute positively to your business and finances. Therefore, in this article, debt factoring is broken down in a way that even a beginner can relate to perfectly. Here you will get to know debt factoring: what it means, how it works, and examples. Meanwhile, it explains better the advantages and disadvantages of debt factoring, debt factoring companies, etc. Below is the meaning of debt factoring, so keep exploring.<\/p>\n
It is just like Invoice factoring<\/a> is simply a means for a business to raise funds at a discount. However, this fundraising comes from the sales of the business’s outstanding invoices or accounts receivables to a third party usually a factoring company. Meanwhile, when these outstanding invoices are sold to the third party, they pay the business a percentage out of the total money involved.<\/p>\n Through this simple means, the business can get quick cash to put back to the business before its clients actually pay off their debt via the factory company. Basically, debt factoring is another terminology for invoice factoring<\/a> or invoice discounting<\/a>.<\/p>\n Generally, it always involves the activities of three parties. The first party is a business; the second party is a client, and the third party is a factoring company. Basically, the third party buys all outstanding invoices from a business and pays the business a major percentage of the total cash. Then, when the client, which is the second party, pays off their debt, the factor balances up the business minus the factoring fee. This is simply the way debt factoring works. Let’s look at the advantages and disadvantages below.<\/p>\n The following below are a few advantages:<\/p>\n Naturally, everything that has advantages equally has disadvantages, so below are the major disadvantages.<\/p>\n It is an outward, short-term source of finance for a business. It is a short-term source of finance together with bank overdrafts and trade creditors. However, a business can raise funds by selling its outstanding sales invoices (receivables) to a third party (a factoring company) at a discount.<\/p>\n A business sells its goods for about $200,000 per month. Then 60 days interval was given to its clients to pay every outstanding invoice. Bringing it down to the average level, the business has about $300,000 unpaid invoices by clients at a given time. Then, the business has to raise funds to enhance its working capital.<\/p>\n Currently, the business has up to 90% of its invoice value cash at hand ($280,000). Now, the factor has to buy the invoice payment from the clients. However, 10% value of the invoice will be sent to the business typically around 3%. The business, therefore, receives around $15,000, which costs them about $7,000 in this example.<\/p>\nRead More: Invoice Discounting: Explained!! (+ Quick tools & amp; all you need)<\/a><\/span><\/h5>\n
How Does Debt Factoring Work?<\/span><\/h2>\n
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Debt Factoring Advantages and Disadvantages<\/span><\/h2>\n
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The Disadvantages <\/span><\/h3>\n
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Is Debt Factoring Short or Long term?<\/span><\/h2>\n
Debt Factoring Examples<\/span><\/h2>\n