A problem well defined is half solved – so goes a saying. Therefore, you should know a few terms like debt, forfaiting, and factoring in detail with a view to taking a decision on your own here. To begin here with the right mindset, let’s understand what a debt is. Well, a debt can be defined as a financial obligation. In other words, a debt refers to a kind of liability that one (maybe an individual or an entity) needs to pay off as per the schedule failing which he/she may be subjected to penalty and others in sync with the provisions of a debt agreement and the laws of the land.
Forfaiting is used in international market where exporters sell their medium term accounts receivable (popularly known as invoice) to a forfaiter at a discount as may be mutually agreed from time to time. Therefore, a forfaiter is a person or an entity that buys the exporter’s accounts receivable and gives instant cash to the exporter. Interestingly, factoring is a financial tool that helps businesses augment fund in no time by selling its’ accounts receivable to a third party at a discounted rate acceptable to both.
You may be surprised to know that factoring came into practice way back in 1400 in UK and then, it reached USA in 1620 holding the hands of the pilgrims. In other words, factoring is an old practice and it is being used with an astounding success in different countries of the world. Hence, invoice factoring companies such as the Vermont invoice factoring companies are doing a great job befitting the needs of diverse industries in the state of Vermont, England.
Why factoring isn’t a debt:
Factoring is neither a personal loan or a mortgage loan. You sell your debtors (clients) to a third party that assumes the responsibility and risk of releasing the payment on your invoice. To put it simple, factoring is a financial tool that gives you access to an instant cash over the counter on fulfilling certain conditions such as the following.
- Volume of business: Though there is no set rule here, still some Vermont invoice factoring companies might ask for £ 100,000 annual turnover with a view to becoming eligible for factoring.
- Years of existence: You and your client must be in business for a good number of years in the niche market.
- Creditworthiness of your client: Your client must have a good credit score.
- Bank guarantee of the importer: In the case of international market, the importer must have a bank guarantee equivalent to or more than the exporter’s invoice value.
Despite using factoring for decades across the industries and the geographies, still there is a widespread confusion whether factoring is a debt. To our extensive search, it would be grossly erroneous to perceive factoring as a debt. Reasons behind such a grossly wrong perception can be attributed to the propaganda in some pockets (understandably for some vested interests such as the high earnings from loans) and no access to factoring even to some of the most eligible companies in the world.