Factoring

Advance of finance against short-term trade accounts receivable by a factor (factoring company). Some degree of credit management is also built into the facility. Facilities can be structured so that the credit risk remains with the business or is passed on to the factor. Factoring is a form of financing, which allows companies to increase their liquidity. To do this, a company or customer signs over trade accounts receivable to the factoring company in exchange for an advance on the amount receivable. It usually is a very expensive way to finance accounts receivable. Most factors initially pay 70% to 90% of the invoice amount followed by an additional payment when they collect the invoice. Ultimately, factors discount the invoice from 2% to 5% or more. Usual conditions are the factor assumes all the liability for the invoice (non-recourse) or the factor can come back to the business should the invoice become uncollectable and require reimbursement (recourse).