Sale of Receivables to a Factor

The sale of receivables to a factor is a financing method in which a business sells its accounts receivable to a third party, called a factoring company or a factor, at a discount.

This helps the business get immediate cash instead of waiting for customers to pay.

For example, consider a small clothing manufacturer, Style Inc.

Style Inc. has issued invoices worth twenty thousand dollars to its customers, payable in thirty days.

Instead of waiting, Style Inc. decides to sell these invoices to a factoring company.

The factor agrees to pay ninety-five percent of the invoice amount upfront, which comes to nineteen thousand dollars.

The factor then collects the full twenty thousand dollars from the customers when the payment is due.

The one thousand dollar difference is the factor’s fee for taking on the risk and providing immediate cash.

Factoring gives businesses like Style Inc. quick access to funds, which can be used to buy materials, pay workers, or manage other expenses, without waiting for customers to pay later.