A factor, in the context of business law, is an agent employed to sell goods or merchandise that have been consigned or delivered to him by or on behalf of his principal. The compensation for his services is commonly referred to as factorage, discount, or commission. A factor may conduct transactions either in his own name or in the name of the principal.
How Factors Operate
Roles and Responsibilities
Factors are fiduciaries who are responsible for:
- Possession and Control: Taking possession of and controlling the goods consigned by the principal.
- Selling: Selling the goods at the best possible price.
- Transparency: Maintaining clear records of all transactions.
- Settlement: Providing periodic settlement of accounts with the principal.
Types of Factors
Factors can be categorized based on the nature of their work and the scope of authority:
- Del Credere Factors: These assume the responsibility for the credit risk of the buyers. They guarantee payment to the principal in case of default by the buyer in return for an additional commission.
- Commission Agents: These handle the sale of goods on behalf of the principal and receive a commission for their services.
- General Factors: These deal with a broad range of goods and do not limit themselves to specific merchandise.
- Special Factors: These are restricted to specific kinds of merchandise.
Compensation
Factors typically earn compensation known as:
- Factorage: The standard commission for their services.
- Discount: Discount on the price of goods agreed upon with the principal.
- Commission: A percentage of the sale price received for executing the sale.
Historical Context
The concept of factor agents has a rich history rooted in trade and commerce. In medieval and early modern Europe, factors played a critical role in the expansion of long-distance trade. Merchants often employed factors in foreign markets to handle sales and reduce risks associated with international trade.
Applicability in Modern Markets
Today, the role of factors extends beyond traditional markets to include services such as:
- E-commerce: Managing sales and logistics for online businesses.
- Wholesale Distribution: Acting as intermediaries between manufacturers and retailers.
- International Trade: Facilitating export and import transactions across borders.
Related Terms
- Factoring: The financial transaction and type of debtor finance in which a business sells its accounts receivable to a third party (factor) at a discount.
- Discounting: In finance, this usually refers to the selling of a bill of exchange before its maturity at a lower price.
- Commission Agent: An individual or firm that sells goods on behalf of another party for a commission.
FAQs
What is the main difference between a factor and a commission agent?
Is a factor responsible for the credit risk of buyers?
How is factorage determined?
Summary
A factor, in business terms, plays a significant role as an intermediary who sells goods or merchandise on behalf of a principal for compensation through factorage, discount, or commission. They navigate the complexities of market transactions, provide guarantees in some cases, and ensure efficient and profitable sales. Their function, evolving from ancient trade practices, remains critical in various modern commercial and financial contexts, especially within international and e-commerce markets.
References:
- Business Dictionary. (2023). Definition of Factor.
- Encyclopedia Britannica. (2022). Factor Law.
- Investment Value. (2021). The Role of Factors in Modern Trade.
For further reading and detailed examples, see also the entries on [Factoring], [Discounting], and [Commission Agents].
