Factoring Lines Of Credit

Written by Patricia Tunstall
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Many factoring banks combine certain elements of traditional banking with the decidedly different viewpoint and financing of factoring companies. Banks have been more conservative both in their prerequisites for loans, and in their factoring programs. They retain the lines of credit in their factoring offerings, for instance, when these are an integral part of their more traditional kinds of financing.

Convenience of Lines of Credit

Asset based lending, using accounts receivable as "collateral," is highly beneficial to businesses that may be inventory- and equipment-rich, but temporarily cash-poor. Although factoring does not involve loans, these factoring arrangements are often spoken of in loan terms. Factors have a range of options, from flat fees to lines of credit, and each factoring company has its own preferred methods of operation.

Some factors are private individuals with enormous bankrolls, and others are publicly-held companies answerable to shareholders. Some factors use annual percentage rates (APR), which are based on the amount to be financed, and some just discount the total of the invoices by several percentage points. Banks prefer lines of credit, and this does offer customers a clearcut limit to their factoring. Customers are kept current on their draws against the credit line by reports from the bank.

The accounts receivable specialist at the bank determines which invoices are creditworthy, totals them, and offers a discounted percentage of the invoices' face value. The agreed-upon total establishes the client's line of credit. When cash is needed for any business purpose, the client can borrow against this credit line in order to grow the business.

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