Although you may hear the term factoring lending used in business discussions or on some blogs or online articles, in reality this is not a correct way to describe the factoring process.
The use of the term “lending” in factoring lending implies a loan. By using a factor, a business avoids the need to obtain a loan. Furthermore, there is no repayment and no interest on factoring services, so a more correct term would be factoring funding rather than lending. To understand the differences a bit more clearly, a closer look at factoring and how it compares to a bank loan for a business is a helpful first step.
What is Factoring?
Factoring allows a third-party, the factor, to provide an advance on your accounts receivables. It is not provided on purchase invoices or contracts, but only for billed work or product already received by your customer.
The advance is typically about 80% of the value of the invoices that the factor buys. At that time, the factor then takes over the collecting and, with final payment, takes their fees from the 20% held back. Any residual amount is sent to you to the account used for the original deposit.
No Credit Check or Paperwork
Another reason that factoring lending is a misleading term is when you compare the application process. With a loan, the business needs to provide extensive paperwork, complete a lengthy application and also have been established for a certain amount of years. The business will also have to have a top credit score, something that can be difficult in these economic times.
With factoring, these issues cease to be a problem as it is the creditworthiness of your customers rather than your business that is of importance to the factor. The application can be completed online and you do not need to provide extensive paperwork. Unlike a loan, approval is typically completed in one business day with funds following within days after.
