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Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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


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


a financial arrangement whereby a specialist finance company (the factor) purchases a firm's DEBTS for an amount less than the book value of those debts. The factor's profit derives from the difference between monies collected from the DEBTS purchased and the actual purchase price of those debts. The firm benefits by receiving immediate cash from the factor rather than having to wait until trade debtors eventually pay their debts and avoids the trouble and expense of pursuing tardy debtors. See CREDIT CONTROL.
Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
Only in the past five years, Romanian factoring market grew by over 100%, and in 2015 recorded the highest growth in Europe (35%), reaching 3.65 billion euros.
However, where a business is a start-up and has insufficient credit history, or has developed a poor credit history, it may need to resort to factoring. This may be possible where its clients - the parties issuing the invoices - have strong credit history, hence the factor can look to the strong credit history of the clients to provide assurance of payment.
Speakers contextualized factoring's rising popularity in the post-financial crisis environment as assuaging the aversion to risk that has rendered both access to credit and trust between trading partners more difficult to come by.
Thus, after signing the factoring agreement, the banks or the factoring companies grant the financing on the day the bills are being presented.
The resulting competition has helped drive the development of increasingly efficient and refined methods for factoring, pitting one scheme against another.
In order for a company to qualify as a traditional factoring client, it must have a track record (1-2 years in business) and meet some minimum sales requirement ($1-2 million annually).
The period from 1900 to about 1970 can be considered factoring's "classical age." Characteristics of that era include the following:
* Markup: Only those with a gross margin of at least 20% should consider factoring, says Paul Goldstein, president of Atlanta-based Presidential Financial Corp.
When Morain visited the observatory and located the factoring machine, he found it was still in good shape.
Miles sold $9,000 in accounts receivables to the Caramon Group, a Maryland-based factoring company with offices in Chicago.
Last week, a team of researchers using a relatively new method known as the number field sieve succeeded in factoring a 116-digit number.
Joseph LaPaglia, president of Cash Flow Funding of Virginia in Richmond, says businesses typically make use of factoring to provide cash flow for immediate working capital needs, such as making payroll, inventory purchases, etc.