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Factoring 101: The Basics

Factoring has been around for many years yet most business owners have never heard of the practice. Factoring is the process in which the factor (like my company Compound Profit) purchases invoices from a client at a discounted rate. The factor advances a certain percentage of the money to the client, handles the billing and customer payment, then advances the remaining balance minus the factor fee to the client.

For example, ABC Inc. is approved for factoring at a factoring rate of 4%. ABC Inc. submits an invoice of $1000. They can get a cash advance for that invoice of up to 80% ($800) within 48 hours. When the customer sends the factoring company the payment, the factor will advance ABC Inc. the remaining balance of 20% minus the factoring fee of 4% ($1000 x 4% = $40). In total, ABC Inc. will receive $960 for their $1000 invoice. If ABC Inc. submits one $1000 each month for 12 months, they will receive $11,520 for $12,000 worth of invoices.

The primary advantage of factoring is that it improves the cash flow of a business. Instead of waiting 30 to 60 days for a customer to pay, the business can receive the majority of what is owed to them within 48 hours. The business can buy more inventory sooner, pay their employees faster, take care of business expenses and be financially prepared for incoming projects. Plus, because this is not a loan, the business will not go into debt and it does not affect personal or business credit.

Factoring, or accounts receivable cash advances, can go a long way in solving a company's financial cash crunch.

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About the Author

Matthew Johnson, Compound Profit Corporation
2816 Sandberg St.
Riverside, CA 92506

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