Factoring Overview and Description

Factoring is a financial transaction in which a business sells its accounts receivable (its invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business.

Or from the Encyclopedia Britannica –

Factoring is, in finance, the selling of accounts receivable on a contract basis by the business holding them—in order to obtain cash payment of the accounts before their actual due date—to an agency known as a factor. The factor then assumes full responsibility for credit analysis of new accounts, payments collection, and credit losses.

Factoring differs from borrowing in that the accounts receivable and the responsibility for their collection are actually sold rather than merely offered as loan collateral. Factoring is employed especially by highly seasonal industries to shift the functions of credit and collection to a specialized agency.


The simple steps of factoring:

Once you become associated with a factoring company:
• Your firm submits invoices (AR’s) from your clients to the factoring company.
• The factoring company buys the invoices from you and immediately sends you 75% to 90% cash.
• The factoring company assumes all responsibility for collections.
• The factoring company collects the full invoice amount from your clients.
• They send you the cash balance, less their fee (2% to 5%).