Accounts Receivable Financing
The
selling of a firm's
accounts receivable to a third party, known as a
factor. If a firm is not confident in its ability to collect on its credit sales, it may sell the right to receive
payment to the factor at a discount. The factor then assumes the
credit risk associated with the accounts receivable. This allows the firm access to
working capital immediately, which is important especially if the firm might otherwise have a
cash flow problem. The price of accounts receivable financing is determined by the
creditworthiness of the firm's customer, not of the firm itself. See also:
Debt assignment.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
factoring
the provision of finance (and other related services) by one firm (the factor) to another firm (the client) by discounting its unpaid INVOICES issued to customers, i.e. purchasing the client's TRADE DEBTS. Factors typically provide immediate cash up to the value of 85% of the client's invoices, thus releasing ready money for the client to use for WORKING CAPITAL purposes. The remaining balance, less the fee for providing the facility, is paid over when the factor has received payment from the customer.
In addition, factors are usually prepared to undertake the administration of their clients' sales ledgers, assess credit risks and insure clients against bad debts, thus saving the client the trouble and expense of maintaining his own sales accounts and credit control departments.
Factoring extends to both domestic and export sales. It can be especially useful in the latter context where credit periods on exports are, on average, two to three times longer than on domestic sales and where there are additional complications arising from dealings with relatively unknown foreign customers and an unfamiliarity with local customs and laws. See EXPORTING, DEBTORS, CREDIT CONTROL.
Collins Dictionary of Business, 3rd ed. © 2002, 2005 C Pass, B Lowes, A Pendleton, L Chadwick, D O’Reilly and M Afferson