What is Factoring?

Factoring is any method to receive advanced funding before your receivables are paid. For example, let's say you perform a $20,000.00 surgery but you know you may not be paid for 90 days as insurance and the patient argue over their policy and their proportionate responsibility.

But, if you know that your chances of payment are high, you can do two things: (1) you could borrow against the $20,000.00 to get some money up front now; or (2) you could "sell" the $20,000.00 for a discount now.

The first scenario is traditional recourse factoring and is explained in my article here. The second scenario is known as non-recourse factoring and is explained in my article here.

Why else would you want to use Factoring?

Asset protection. By getting your Accounts Receivable "out" of your business and into the factoring company, you can avoid the business owning a large amount of accounts receivables if the business is sued. The cash received by the business could have a lien placed against it by the factoring company to protect it, as well as the cash could be distributed out as salary and other distributions.

For professionals, an Accounts Receivable LLC may be a good opportunity to allow non-professional spouses, children, or other investors to get involved in a professional practice. Each dollar that can get "out" of the risk-generating company (the practice) into a company that generates relatively small risks (the accounts receivable company), is a dollar that is much more protected than if you did nothing. There may be income tax efficiencies as well, assuming that the children's tax brackets are lower than the professional, and assuming the "kiddie" tax is not applicable.

In other words, you can be flexible and use an outside factoring company (of which numerous options and a competitive market exists), or you can form your own factoring company / Accounts Receivable, LLC to provide these services. This way you don't really "give up" any of the income and you gain large amounts of protection.


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