factoring
The sale of accounts receivable to a third party (the factor) at a discount in exchange for immediate cash, transferring the collection risk to the buyer.
Example
“The trucking company factored its invoices, selling $100,000 in receivables to a factor for $95,000 to cover immediate fuel costs.”
Memory Tip
FACTORING = sell your invoices at a discount for immediate cash. Give up some profit for speed.
Why It Matters
Factoring matters because it helps small business owners understand alternative financing options when they need immediate cash flow. Rather than waiting 30, 60, or 90 days for customers to pay invoices, businesses can get money right away by factoring, though at a cost that reduces their total revenue.
Common Misconception
Many people think factoring is the same as taking out a loan, but it is actually the sale of an asset rather than borrowing money. With factoring, the business does not have to repay the factor; instead, they simply receive less money upfront because the factor keeps a percentage as their fee and takes on collection risk.
In Practice
A printing company has invoiced a major client for 100,000 dollars due in 60 days but needs cash immediately to buy supplies. They sell this invoice to a factor who pays them 90,000 dollars right away, meaning the factor keeps 10,000 dollars (10 percent). When the client pays in 60 days, the factor receives the full 100,000 dollars, profiting from the discount they offered for immediate payment.
Etymology
From Latin 'factor' (one who acts for another) — a FACTOR buys and collects the receivables.
Common Misspellings
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See Also
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