What is factoring?
This is a transaction which involves a business selling its receivables to an intermediary known as a factor. It's sometimes done to help a company meet its immediate cash needs.
Where have you heard about factoring?
If you're in business, you might have heard about how it can be used by some firms to obtain cash when needed. But in some industries, financially sound companies may factor their accounts because this is their traditional method of financing.
What you need to know about factoring.
Receivables are financial assets that allow the owner to collect money from the debtor involved. So factoring involves not only the factor, who purchases the receivable, but also the seller and the debtor who is required to make a payment to the owner of the invoice. Factoring, along with invoice discounting, is used by business to business (B2B) companies to make sure they have the immediate cash flow needed to meet their obligations. However, invoice factoring isn't an option for business to consumer (B2C) companies, because they don't usually have business or commercial clients.
Find out more about factoring.
Our guide to reverse factoring explains what happens when the buyer sells their debt to the factor.