Definitions

Get the final word on business definitions that can help you stay in the know and very competitive.

Working Capital Factoring

When a small or medium-sized business is seeking working capital, factoring is one financial option to evaluate and clearly understand.

Factoring refers to when a business raises cash by selling uncollected, outstanding invoices to a third party (a "factor"). The factor pays the business a discounted portion of the face-value of the invoices. The business is then free to spend the cash received for any purpose. Depending on the type of factoring agreement, collection of the invoice may remain a responsibility of the business or it might be assumed by the factor.

Small business owners tend to investigate working capital factoring for a number of reasons. All businesses need cash flow in order to remain competitive, but often a small business owner might struggle with the demands and limitations of commercial loans. Factoring operates under a different set of rules and covenants and so it can be easier for many businesses to qualify for this method of financing.

While factoring is one option for getting working capital, there may be other solutions applicable for overcoming cash flow challenges within a small business. One such option is our Merchant Cash Advance. A Merchant Cash Advance is similar in some ways to factoring, but these two options should not be confused.

Like factoring, a Merchant Cash Advance does not require immaculate credit of either the business or its owners, it has no restrictions on business use and it can be arranged very quickly. But while factoring requires a sale to be made to create an outstanding, uncollected invoice, a Merchant Cash Advance is a sale of future credit and debit card sales. Payments made with respect to a Merchant Cash Advance align with the business' credit and debit card sales volume, which can help the business' cash flow management.

If you are looking for working capital factoring, we encourage you to first evaluate a Merchant Cash Advance. The difference could be money in the bank for your small business!

Return to Definitions List