Debtor Factoring 101: What It Is and Whether It’s Right for Your Business

Debt factoring isn’t just for big corporations, celebrities, and Wall Street banks; it’s also available to small businesses like yours. debtor factoring, also known as accounts receivable financing, allows you to obtain the cash owed to you by your customers now rather than later (or not at all), making it possible to take advantage of opportunities that would otherwise be out of reach—without paying any upfront fees or interest on your debt.

What debt factoring is?

Debt factoring, sometimes called accounts receivable financing, allows a business to sell its unpaid invoices. The factor buys your invoices and makes monthly payments directly to you, usually within 30 days of purchase. This solution can help provide cash flow during slow periods or times when clients are taking longer than usual to pay their bills. Debt factoring is not a loan—it’s simply a way for businesses that are owed money to get paid sooner. You don’t have any obligation to continue using debt factoring after your first transaction; it’s completely optional.

How does it work?

Debt factoring is an alternative form of financing that can provide small businesses with immediate access to capital by allowing them to sell their unpaid invoices at a discount. If you’re trying to figure out how debt factoring works, it’s helpful to think about it as a way for companies in need of cash to get money from people who owe them money. The process involves selling your receivables—invoices you’ve sent out but haven’t been paid yet—to another company (the factor) at a discounted rate. This allows you to use those funds immediately, rather than waiting until your customers pay up. The factor will then collect on your invoices from your customers over time, which means you don’t have to wait months or years for payment either.

When does debt factoring make sense?

Debt factoring, also known as invoice discounting, is an often-overlooked method of financing that can be an effective addition to your financial arsenal. So what is debt factoring? Simply put, a business sells its accounts receivable (i.e., invoices) to a third party. This company then collects those invoices on behalf of your business, which means you don’t have to wait 30 or 60 days for customers to pay their bills. In return, you pay a fee based on a percentage of each invoice collected by the factor. The process works like so: A customer purchases goods or services from you; you send them an invoice; they pay it in full within 30 days, and then it gets sent off to your factor, which collects payment in full within another 30 days. If any part of that process doesn’t happen—if they don’t pay within 30 days or if they don’t pay at all—your factor will absorb some or all of that loss on your behalf.

When does it not make sense to use debt factoring?

The one scenario where factoring makes no sense is when you have plenty of cash flow coming in from your customers. If your customers are paying you quickly, there’s really no point in using a factoring company. Instead, just use that money to grow your business. Debt factoring can be a good way to raise additional capital without having to give up equity in your business. For example, let’s say that you’re running a tech startup that sells cloud-based IT management software. You already have some investment capital but want to raise more money so you can hire a few new employees—but you don’t want to give up any equity in your company in order to get it.

Frequently Asked Questions about Small Business Factoring

Debtor factoring allows small businesses to obtain financing from third-party financiers that offer immediate access to working capital. Because it is often compared to invoice factoring, we will review a few frequently asked questions about debt factoring versus invoice factoring, as well as what businesses can do in order to maximize their funding opportunities.