What is a factoring loan?   A factoring loan, also known as an asset-based loan, is a type of business loan where the lender is willing to provide credit based on the amount of revenue the borrower is anticipating having in the near future.    When a business allows their clients to pay them over a period of time, otherwise known as “on terms”, they have become a lender themselves. The business makes the sale and then invoices their client requesting payment in the near future. That period of time is often 30-90 days. However, in some circumstances, the client takes their time paying the business.    In situations like these, the business can run short on the cash needed to pay its bills such as payroll and other operating expenses. That is when a factoring loan makes sense for the business.    When your business becomes a lender   Imagine your business makes a product. When buy the components needed to make that product the supplier might let you take some time to pay their invoice. Let’s pretend that time is 15 days.   Now, your business takes those components and spends 5 days producing the product you sell. Then you sell that product, but because your competitors offer “terms” to their clients you do as well. Let’s say that you allow your clients to take 30 days to pay your invoice.    In this example, your business has become a lender. In the above scenario, you have a timeframe of about 20 days where your business out some cash because it has paid for the components to produce your product, paid for the staff to manage the sale of the that product, but you are still waiting for your client to pay for the product they have already received.    It is in situations like this that a factoring loan comes in handy.    Discounting your factoring loan   Lenders that make factoring loans will generally lend you a portion of the total amount of invoices that you are due in order to tide your business over for a period of time. In the above example that would be the 20 days.    One note to think about, however. When you offer your clients terms there is the possibility that some will not pay you within the required timeframe. Lenders that do factoring loans know that and they will discount your line of credit by that amount. This is often true for any invoices that are past 90 days due.   If you’d like to talk about your particular situation and get my input on what type of loan, if any, makes sense for your business just reach out to me here.