Factoring
In business, factoring is the sale of a company’s accounts receivable to a third party at a discount. The purchaser of the receivables, called the ‘factor,’ pays the company cash for the invoices and then collects payment from the debtors.
The main advantages of factoring for companies are that it provides them with working capital without taking on additional debt, and it can be easier to obtain than a bank loan. Factoring can also help companies improve their cash flow and make it easier to manage their finances.
There are two types of factoring: recourse and non-recourse. With recourse factoring, if a debtor does not pay an invoice, the company that sold the receivable is responsible for repaying the factor. With non-recourse factoring, the factor takes on all the risk and is responsible for collecting payment from debtors.
Factoring is not right for every business, but it can be a helpful financial tool for companies that have difficulty obtaining traditional financing.
