When a business organization sells its accounts receivables to a third party called factor for a commission or fees in return, it is termed as factoring. It is a type of finance to support the short-term liquidity needs of the business.
The concept of factoring is widely popular among the business organizations and its services have entered in different sectors of the industry. Factoring services in different industries are termed as specialized factoring.
Table of Contents
With the expansion of business and its needs, the factors have widened their area of service to sectors where they were not present earlier. The growing technology and ease of communication has led to the expansion of factoring services and has enabled them to enter specific industries.
The terms and conditions of each industry are different as they work with different business models. The approach of factor varies from industry to industry depending upon the cost of factoring service. Some of the specialized factoring services are as follows:
Real Estate Factoring
In real estate factoring, the business sells its accounts receivables in the form of real estate commission to a third party called factor at a discount. The factors provide the factoring service only to licensed real estate agents. The real estate factoring was first introduced in Canada. Later, it made its way to America after 2007 recession. The real estate factoring model has become global and followed in almost all countries around the world.
The healthcare industry has long payment cycles and faces cash flow problems due to the slow payment process. The long time horizon to receive the payment is the biggest challenge that the healthcare industry is facing today. Medical factoring solves this problem by purchasing the medical claims and making payments to the companies. The factoring agency in return charges fees or commission and holds the claims until maturity.
The construction industry requires the services of factoring because the payment cycle in this industry is very long. The average payment cycle is 120 days and sometimes even more. This makes the functioning of the industry difficult. To overcome the problem, the factor purchases the construction receivables from the clients and allows them to function smoothly. This saves the construction industry from the various risks and exposure associated with the business.
The factoring companies provide their factoring services to those firms that run trucks or provide services using the truck as a transportation medium. The trucking factoring services include purchasing their invoices, funding them based on the invoice copies sent by email or text. The factoring services also include providing the truckers with fuel advance cash if they have a confirmed pickup of the load.
Factoring services have become a critical part of the business as they provide business with regular cash by purchasing its receivables. It saves the time of dealing with the receivables and helps to focus on their core business areas. With the growing needs of factoring, their services have entered into different specialized sectors. This has eased the business functioning and helps in meeting their working capital needs.1–3