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What's the difference between "Factored Funds and Letters of Credit" ?

For those of you with background on Economics and or Business Discipline, how can you effectively apply "Factored Funds to execute L/CS" and or Shipments?

Factoring is a way for a small or a credit poor company to generate cash flows by the sales of its receivables to a third party. A Letter of Credit is a guarantee from 2 banks, the issuing and corresponding, that assure that the required goods or services in the letter will be delivered or performed within terms, and that payment will be made.


It truly is an experienced answer. But then isn't that usually what we get from Russ? Factoring is one of the oldest cash flow tools in use, and when used properly, it can nicely level the playing field for small businesses. Cash flow has always been the bane of small business. Hey, Russ


It seems that what you are trying to do is use your receivables, which are factored, to make purchases from your vendors with letters of credit. You should talk to your bank and ideally you would use the same bank for both sides of the transaction to simplify the process. But if you are transforming your purchases in any way -- if you are a manufacturer, for instance, making raw materials into finished products -- you will find that banks are very reluctant to assume the risk of the transformation process. If, however, you are buying something and selling it exactly as is at a markup, like a distributorship, then you might make this arrangement work.

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