Factoring

Factoring is selling ACCOUNTS RECEIVABLE to another business in order to obtain cash payment before the due date on the account receivable. In many businesses, cash flow— the stream of revenues and expenses—is a major problem. Creditors want payment on delivery or shortly afterwards, and customers tend to delay payment, often for 30–90 days after receiving the good or service. Factoring allows businesses to get their money (at a discount) by selling the right to receive the future payment from a customer. Once factored, the account receivable becomes the property of the company (factor) purchasing the CONTRACT. The factor, assuming the risk that a customer may delay or DEFAULT on payment, pays the seller a discounted amount below the amount owed. To effectively assess RISK, factors have to be familiar with the firms and practices in the markets they operate in. Factoring is most associated with the garment industry and is conducted primarily by large factoring finance companies.