Business Factoring is the practice to raise capital by selling the orders who's payments are yet to be received/invoiced. The invoices are sold on a discount to a third party in exchange for immediate cash.Unlike a bank loan three parties are involved in the process.
This mode of raising capital was previously common in textile and manufacturing industry but now-a-days almost all types of business consider business factoring as a mode of financing at one point or another.Companies sell their invoices at a discount to their face value if the calculations show that it is better to use the proceeds to strengthen its own growth rather than functioning as its customer's bank.Henceforth factoring should only be practiced if the rate of return on the proceeds invested in business expansion exceed the costs linked with Factoring process.
The IT, ecommerce, Saas companies can use business factoring in the times of inadequate cash reserves.Some firms also resort to this practice to show extra cash on their balance sheets.
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Social Infotainment is authored by Supreet Sharma.It covers technology startups in web, mobile and other high growth domains. Lookout for interesting and well researched posts on business models, venture capital funding, marketing and other similar stuff.