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More Factoring Service Basics
Sometimes, because the seller is a new company, it may find it difficult to
secure traditional bank financing. An alternative source of financing in such an
instance is to use factoring service by selling accounts to a finance company (the
factor) in order to gain immediate access to the cash owed to the seller by its
customers. Instead of sending bills directly to the customer, the company sends
its invoices to the factoring service, who immediately pays the company–thereby eliminating
the 30, 60, or even 90 days of waiting that normally encompasses a billing
Factoring service has been available to a variety of companies for many years. Some factoring service specialize only in retail financing, others specialize in freight-bill factoring for trucking companies, and others only factor invoices for manufacturing companies. Factoring service may be more expensive than traditional bank financing but often it is the only source of financing that some new or under-capitalized companies can find.
Recourse factoring service is now the most common type of factoring transaction. This factoring transaction allows the factor to go back to the seller if payment is not received (normally after a 90 day period). The credit risk does not transfer to the factor during the recourse factoring service process.
Normally, in the event of non-payment by the customer, the seller must buy
back the invoice with another invoice (credit worthy). Recourse factoring is
typically the lowest cost for the seller because the risk for the factor on the
funding transaction is lower.
An invoice is a commercial document issued by a seller to a buyer, indicating the products, quantities and agreed prices for products or services with which the seller has already provided the buyer. A commercial invoice factoring indicates that, unless paid in advance, payment is due by the buyer to the seller, according to the agreed terms. Commercial Invoices are often called bills.