What Is Factoring

Factoring is a financial transaction in which a business sells its accounts receivable (invoices) to a third party, called a factor, at a discount. This allows the business to obtain immediate cash flow, rather than waiting for the payment terms of the invoices to be fulfilled by its customers. Factoring is commonly used by businesses to manage cash flow, especially when they have long payment cycles or need funds to cover operational expenses.

Key Points About Factoring:

1- Parties Involved:

• Seller (Client): The business that sells its receivables.

• Factor: The financial institution or company that purchases the receivables.

• Debtor: The customer who owes payment on the invoice.

2- How It Works:

• The business sells its unpaid invoices to the factor.

• The factor advances a percentage of the invoice value (typically 70-80%) to the business upfront.

• The factor collects payment directly from the debtor (customer) when the invoice is due.

• Once the payment is received, the factor remits the remaining balance to the business, minus a fee.