A factoring company takes the risks of holding short-term debt and capitalizing it into a stock or warrant. The factoring company issues a promissory note to the borrower, which promises that the borrower will receive a lump sum based on the difference between the value of the stock or warrant and the current fair market price of the product or security being offered. Once the factoring transaction is complete, the seller is then owed a portion of the difference between the value of the stock or warrant and the current fair market price. This factoring transaction is referred to as a margin loan.
The factoring system offers buyers an opportunity to purchase the debt at a lower rate than would be possible if they purchased it through a traditional financing source. The factoring system is usually a partnership between the buyer and the seller. In order for the buyer to qualify for a factoring transaction, he must purchase at least 100 percent of the issued shares by the seller. To participate in the factoring agreement, the buyer must promise to purchase at a specific price and pay for the net purchase price if the buyer loses the investment. The factoring agreement typically stipulates that the buyer is not responsible for paying interest or dividends on the funds advanced; therefore, there are no penalties associated with the agreement.
An important benefit to the factoring system is that there is no credit risk associated with the investment. The factoring agreement does not effectively transfer the risks of interest or dividend payments to the buyer. In fact, there is only a direct financial liability to the seller – the amount of the outstanding balance.
The factoring system simplifies the loan application process by relieving buyers of many of the administrative burdens associated with applying for a loan. The factoring services are designed to eliminate the need to prepare a comprehensive application package by preparing a list of the required documents and completing the application. The factoring services also make it easy to qualify for a loan by establishing an expedited processing date. When a factoring company advances funds to a borrower, the funds are immediately released and do not affect the credit rating or cash flow of the borrower.
The factoring system is similar to the traditional mortgage loans in that it provides borrowers with readymade equity. However, the difference lies in the factoring modules that allow borrowers to take advantage of the system even when they have bad credit. These ready made equity investments are called factoring options. There are two types of factoring modules available from readymade equity providers. Borrowers can either purchase a mortgage factoring module or invest in a non-qualified factoring module.
Mortgage factoring solutions provided by finance companies usually incorporate the mortgage factoring automation systems. The mortgage factoring system is one way finance companies make up for the factoring costs that are normally included in the loan. The automation system of the financial software enables calculations to be done automatically once per month. This enables the lender to dispense only what is needed without running risks on factoring accounts held by non-qualified borrowers.
Another factor affecting the popularity of this type of product is the factoring companies’ flexibility in determining the terms of contracts. Finance companies set the monthly minimums and the interest rates depending on various criteria such as credit score of the borrower, down payment made, and property value. The monthly minimums are based on the value of the mortgage and can vary due to fluctuating market conditions. As such, finance companies provide borrowers with several alternatives on which they can base their decisions such as choosing the terms and interest rate depending on the option that offers the lowest monthly value.
Finance companies offer mortgage factoring services to buyers in three ways. Firstly, there are buyers who choose to purchase a mortgage factoring contract based on the equity they own. Secondly, there are buyers who enter into agreements with factoring services to pay a lump sum amount upfront as down payment. And thirdly, there are buyers who allow the factoring services to finance their entire purchase.