Factoring AgreementCredit Repair Definition
A financial arrangement where a business sells its accounts receivable (invoices) to a third party (factor) at a discount for immediate cash.
Definition
A factoring agreement is a contract between a business and a factoring company (the 'factor'). Under this agreement, the business sells its outstanding invoices (accounts receivable) to the factor at a discount. The factor provides the business with an immediate cash advance, typically 70-90% of the invoice value. The factor then takes responsibility for collecting the full payment from the business's customers (the debtors). Once the customer pays the invoice, the factor remits the remaining balance to the business, minus their fees (the discount). Factoring provides businesses with quick access to working capital tied up in unpaid invoices, improving cash flow, but it comes at a cost (the factor's fees).
Frequently Asked Questions
What's the difference between factoring and accounts receivable financing?
In factoring, the business sells its invoices outright to the factor, who typically manages collections. In accounts receivable financing, the business uses its invoices as collateral for a loan or line of credit but retains ownership of the invoices and usually manages collections itself.
What is recourse vs. non-recourse factoring?
In recourse factoring, the business must buy back any invoices that the factor is unable to collect from the customer. In non-recourse factoring, the factor assumes the credit risk of customer non-payment (though usually not for disputes related to goods/services quality). Non-recourse factoring is typically more expensive.
How much does factoring cost?
Factoring costs vary but typically include a processing fee and a factor fee (discount rate), which is often calculated based on how long the invoice remains outstanding. The total cost can be higher than traditional bank loans, often expressed as a percentage of the invoice value per month.
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