A factor is a financial intermediary that purchases accounts receivable from a business. The factor agrees to pay the invoice amount, less a discount for commission and fees, thereby providing the business with immediate cash flow.
Role of a Factor
Requirements to Qualify for Factoring
Benefits of Factoring
Example of Factoring Process
Applicability in Modern Business
Comparisons with Related Financial Services
Related Terms
- Accounts Receivable: Money owed to a company by its debtors.
- Invoice Discounting: The practice of using a company’s unpaid invoices as collateral for a loan, distinct from factoring.
FAQs
What is the primary benefit of using a factor for a business?
The primary benefit is immediate cash flow, which helps businesses manage their day-to-day expenses without waiting for invoice payments.
Is factoring considered a loan?
No, factoring is not a loan. It is a transaction where receivables are sold at a discount.
References
- Financial Management Textbooks
- Finance Journals
- Business Financing Resources
Summary
Factoring offers businesses a way to improve cash flow and manage operations efficiently by converting accounts receivable into immediate funds. This financial strategy has evolved to provide a multitude of benefits for businesses of various sizes.
