outright sale of a firm’s accounts receivable to another party (the factor) without recourse, which means the factor must bear the risk of collection. Some banks and commercial finance companies factor (buy) accounts receivable. The purchase is made at a discount from the account’s value. Customers either remit directly to the factor (notification basis) or indirectly through the seller (non-notification basis).
short-term financing from the nonrecourse sale of accounts receivable to a third party, known as a factor. The factor assumes the full risk of collection, including credit losses. Factoring is most common in the garment industry, but has been used in other industries as well. There are two basic types of factoring: (1) discount factoring, in which the factor pays a discounted price for the receivables prior to the maturity date; and (2) maturity factoring, where the factor pays the client the purchase price of the factored accounts at maturity.
Factoring can be on a notification, or a non-notification basis. The typical method in accounts receivable factoring is non-notification financing, in which the client’s debtors are not notified and the client remits payments to the factor as they are received. Factoring is normally done without recourse, meaning that the factor assumes the risk of nonpayment. Financing carried out on a recourse basis is called accounts receivable financing.
type of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent. The receivables are sold with or without recourse. Factors also accommodate clients with overadvances, that is, loans in anticipation of sales, which permit inventory building prior to peak selling periods. Factoring has traditionally been most closely associated with the garment industry but is used in other industries as well.
type of financial service whereby a firm sells or transfers title to its accounts receivable to a factoring company, which then acts as principal, not as agent. The receivables are sold without recourse, meaning that the factor cannot turn to the seller in the event accounts prove uncollectible. Factoring can be done either on a notification basis, where the seller’s customers remit directly to the factor, or on a non-notification basis, where the seller handles the collections and remits to the factor. There are two basic types of factoring:
- Discount factoring arrangement whereby seller receives funds from the factor prior to the average maturity date, based on the invoice amount of the receivable, less cash discounts, less an allowance for estimated claims, returns, etc. Here the factor is compensated by an interest rate based on daily balances and typically 2% to 3% above the bank prime rate.
- Maturity factoring arrangement whereby the factor, who performs the entire credit and collection function, remits to the seller for the receivables sold each month on the average due date of the factored receivables. The factor’s commission on this kind of arrangement ranges from 0.75% to 2%, depending on the bad debt risk and the handling costs.
Factors also accommodate clients with “overadvances,” loans in anticipation of sales, which permit inventory building prior to peak selling periods. Factoring has traditionally been most closely associated with the garment industry, but is used by companies in other industries as well.