To help cover this financial gap an industry
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In the meantime, the companies' employees are expecting to get paid on time; which is usually weekly, and most of the operating expenses need to be covered on a monthly basis. Some of the bills even need to be paid right up front. It can be tough for a growing or new company to make ends meet before the 90 days are up and the payments start coming in.
To help cover this financial gap an industry called factoring has emerged. Let's use an example to explain how factoring works. Let's say company A makes and sells super computers. They make a computer, sell and ship it to company B and soon after send out the bill for the computer. Now by standard industry practice, company B usually does not have to start making payments for 90 days. This is where factoring enters in. A third company, company C, is the factoring company. The factoring company is usually a financial institution or bank of some sort. The factoring company pays company A up to 85 percent of what is owed them by company B right up front then and there. They hold out a percentage, usually 15 percent, to cover any disputes that may arise between A and B. Once company B gets around to paying for the super computer, the payment gets sent directly to the factoring company. Company A never sees the check sent out by company B. Basically company A's accounts receivable are transferred to the factoring company. The factoring company then sends the 15 percent that was held out to cover disputes to company A, minus their factoring fee for all of this. The factoring fee is usually 1.5 to 2 percent. They basically cover company A for the payments that are owed them. They act as an intermediary between A and B to help smooth everything out financially.


