Let’s say you have a business with outstanding invoices that people or companies owe you or your company for your products or services. If you have a problem collecting or just want your money quicker, you can use a factoring company to pay you for your invoices to others. This is done at a cost of course but if you are having money flow problems needing money quickly this is where they come in. They will usually charge a percentage of the money they pay you. If you are doing business with companies with bad reputations or bad credit they will probably not take on that invoice. Example: You have a roofing business. You do repair work on 10 houses in my neighborhood at $100.00 each. You invoice the 10 different houses $100.00 each. You have billed out $1,000.00 total for my neighborhood. Your invoice says payment due in 45 days. You would like payment sooner because you have more work to do but you need money to buy supplies so you turn over those 10 invoices to a factoring company. They offer you $800.00 for them. You accept. You get your $800.00 immediately and keep your business going. The factoring company made $200.00 profit. That’s basically how they work. There are differences from company to company that can make a big difference in cost and responsibility of your customers paying etc.

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Factoring is a way in which companies sell their billing (invoices to customers) to get cash faster than waiting for the customer to pay. Generally the cost is from 5-20% of the invoice factored. The type of business that does factoring is a credit/finance company. Let’s say I sell $10,000 worth of bolts & nuts to my customer on open account. So I buy the bolts/nuts then ship to my customer and send them a bill (invoice). But now let’s say I need cash so I can pay my vendors and my employees. I can sell my invoice to a factoring company and they will send me a check for the difference between the invoice and their fee (so between $8000 and $9500). Then when the customer pays the entire check would be sent to the factoring company, I would not get any of the customers money. Hope that helps