Factoring Accounts Receivable
Factoring Accounts Receivable involves the outright sale of receivables to a factor (bank or other institution) at a discount
Factoring constitutes about one-third of the total financing secured by accounts receivable and inventory in the U.S.
Factoring Agreement
A factoring agreement states the exact conditions, charges, and procedures for the purchase of an account receivable
Factoring is normally done on a notification basis, thus the factor receives payment of the account directly from the customer
The factor often makes the credit decision and is responsible for collecting the amount owed, thus assuming all the credit risk (nonrecourse basis)
The factor usually pays the firm when the account is collected or on the last day of the credit period, whichever occurs first
The firm maintains an account with the factor in which surplus funds can be left to accrue interest or the factor may make advances (loans) funds can be borrowed against uncollected accounts not yet due
- 1994, HarperCollins Publishers