A factor is basically a financial institution that purchases accounts receivable from businesses. The factor normally bears the credit risks associated with the accounts receivable purchased by it. There are about twenty firms in the United States engaged solely in factoring. These firms raise their operating funds by issue of equity and debt capital.
The factoring agreement governs the relationship between the factor and the business whose accounts receivable the factor purchases. The following conditions are typically found in factoring agreements. The factor will select only those accounts receivable which appear to be acceptable to it. The sales of accounts receivable will be done to the factor on a non-recourse basis. This implies that the factor has to absorb the losses arising from uncollectible accounts.
The factor would set up an account, similar to a bank deposit account, for the firm. Monies will be deposited in this account as payments are received or as due dates arrive. The firm can freely withdraw amounts from this account. Surplus balances in the account earn a certain rate of interest. The factor is liable to pay the firm on the last day of the credit period or when the account is collected, whichever occurs first.
The factor will advance money to the firm against not-yet-collected and not-yet-due accounts receivable. These advances, representing a negative balance in the firm’s account, carry a certain rate of interest. Factoring costs consist of three elements: factoring commission, interest levied on advances, and interest paid on surplus balances. Factoring commission is payment to the factor for administering the tasks of receivables management and bearing the risk of bad debt. Factoring commission is usually 1 to 3 per cent of the face value of the accounts receivable factored. The interest period on advances may be 2 to 4 per cent higher than the prime rate.
Related Articles of Interest :
-
Accounts Receivable Factoring
10 August 2010 8:30 PM |
No Comments
Accounts Receivable Financing and Accounts Receivable Factoring are two terms that are intermittently used, but there is a major difference between them. Although both refer to the concept of extending cash to an owner of a business in lieu of invoices and other Accounts Receivable,...
-
Accounts Receivable Factoring Companies
10 August 2010 8:30 PM |
No Comments
As an owner of a company, you may have felt frustrated because your cash is tied up in fixed inventories and so you don’t have enough cash flow to energize your business. And keeping track of the invoices and the slow payments may distract you...
-
Invoice Factoring Companies
10 August 2010 8:30 PM |
No Comments
Invoice factoring companies are companies that fully manage a business’s sales ledger, and ensure collection of all the debts due. Invoice factoring companies buy invoices or receivables from a business and advances 80 to 90 percent of the invoice amount. The remaining amount minus the...
-
Truck Invoice Factoring
10 August 2010 8:30 PM |
No Comments
Truck invoice factoring is the outright buying of the invoices of business establishments by truck invoice factoring companies. This helps companies to maintain smooth cash flow. Most truck invoice factoring companies are commercial establishments and deals in the purchase of invoices and some offer other...
-
Accounts Receivable Financing
10 August 2010 8:30 PM |
No Comments
Accounts Receivable Financing and Accounts Receivable Factoring are two terms that are interchangeably used, but there is a major difference between them. Although both refer to the concept of extending cash to an owner of a business in lieu of invoices and other Accounts Receivable,...
-
Invoice Factoring Discounting
10 August 2010 8:30 PM |
No Comments
Invoice discounting is similar to invoice factoring, the difference being that the sales ledger management and the factoring company does not take up the collection responsibility. Invoice Discounting is good for businesses that are established with sufficient staff and infrastructure to keep accounts. The option...
-
Loan Factoring
10 August 2010 8:30 PM |
No Comments
Factoring of receivables is an arrangement whereby a company sells its accounts receivables to another company (banks and other institutions) that specializes in buying them and obtains the necessary financial accommodation. It is the most popular method of short-term financing in the US. Factoring offers...
-
Invoice Factoring Rates
10 August 2010 8:30 PM |
No Comments
Invoice factoring rates are the rates charged by invoice factoring companies for the services offered and cash advanced to businesses. Invoice factoring, otherwise called invoice discounting, is a business strategy by which a company’s invoices or receivables can be signed off to an outside company,...
-
Invoice Factoring Specialists
10 August 2010 8:30 PM |
No Comments
Invoice factoring specialists provides an asset based financing alternative for those business that needs working capital to enhance cash flow or improve upon their present business structure. It works on a simple format. A company sells goods or provides service to a customer. The invoice...
-
Online Invoice Factoring
10 August 2010 8:30 PM |
No Comments
Online invoice factoring helps business establishment dealing with factoring companies to keep track of the cash flow. It provides the status of the invoices and details about debtors. Financial position of the companies in regard with invoices can be obtained through online invoice factoring. The...