WHAT IS FACTORING

Factoring is the process by which a company sells its accounts receivable (A/R) invoices to a third party, known as a “factor,” at a discounted rate. The specific details of these transactions, such as the structure and terms, can vary widely. Factors are known for their flexibility and ability to provide financing options that may not be available through traditional lenders.

Companies that engage in factoring are referred to as “clients” or “sellers,” while the customers who owe money on the invoices are called “account debtors” or “customers.” The act of a factor accepting invoices for purchase can be described using various terms, including “schedule,” “funding,” “advance,” “assignment,” and “transaction.” The initial payment made by a factor to a client for factored invoices is known as an “advance.”

Unlike traditional commercial lending, which involves a loan of money, factoring involves the transfer of assets. As such, factors assess risk based on the quality of the asset being purchased (i.e., the ability to collect client receivables) rather than the financial condition of the seller/client. This makes factoring a suitable financing option for many growing businesses when traditional commercial borrowing is not available or practical.