A factor in business is a person or company that provides financing to businesses in exchange for a portion of the business’s future sales. Factors typically purchase receivables (invoices) from businesses at a discount and provide the businesses with immediate cash. The businesses then repay the factor over time, with interest, from their future sales. Factors help businesses by providing them with needed capital and by taking on the credit risk of the business’s customers.
Factoring is not a loan; it is the purchase of a business’s receivables at a discount. Because factors take on the credit risk of a business’s customers, businesses that factor their receivables typically have higher levels of debt than companies that do not factor. However, businesses that factor their receivables also have access to more capital, which can help them grow.
There are two types of factors: invoice factoring and accounts receivable factoring. Invoice factoring is the purchase of a business’s invoices at a discount. Accounts receivable factoring is the purchase of a business’s accounts receivables (the money that the business is owed by its customers) at a discount.
Invoice factoring is the most common type of factoring. In invoice factoring, the factor pays the business for its invoices upfront, minus a fee. The business then repays the factor over time, with interest, from its future sales. The factor takes on the credit risk of the business’s customers, which means that businesses that factor their receivables typically have higher levels of debt than companies that do not factor. However, businesses that factor their receivables also have access to more capital, which can help them grow.
Accounts receivable factoring is less common than invoice factoring, but it can be more expensive. In accounts receivable factoring, the factor pays the business for its accounts receivables (the money that the business is owed by its customers) upfront, minus a fee. The business then repays the factor over time, with interest, from its future sales. The factor takes on the credit risk of the business’s customers, which means that businesses that factor their receivables typically have higher levels of debt than companies that do not factor. However, businesses that factor their receivables also have access to more capital, which can help them grow.
Factoring is a popular financing option for small businesses because it is easy to obtain and it does not require collateral. However, factoring can be expensive, and it can be difficult to find a factor that is willing to work with a small business.