Some Facts on Accounts

Receivable Factoring

Factoring or Accounts Receivable Factoring

in a business is a business transaction in

which a business sells or transfers its

accounts receivables (or invoices) to a third

party (called a factor) at a discount. In this

there are three parties who are directly

involved in the Factoring. They are the

Business Owner or the person who sells the

receivable, the Debtor or the customer of the

Business Owner and the Factor or the buyer

of the Receivable.

The Receivable is usually a financial asset

that the Debtor owes the Business Owner in

return for goods sold or services rendered.

There are different types of factoring that are

practised. They could be ‘advance’ factoring

or ‘maturity’ factoring that are mostly in

practice.

In the case of ‘advance’ factoring, the seller or

the business owner sells his invoices to the

factor at about 70%- 80% of the cost price of

the account receivable value. It is then up to

the factor to pursue the debtor and collect

the money and then finally repay the balance

30%- 20% of the cost of the invoices back to

the business owner. This repayment to the

business owner is done after deducting the

charges deductible by the factor like

commission, fees etc.

In the case of a ‘maturity’ factoring, the factor

is not required to make any upfront payment

to the business owner. After getting the

invoices from the business, the factor

proceeds to collect the receivables from the

customer or the debtor within the

predetermined or stipulated time, say 2

weeks or 1 month. In case the debtor fails to

repay within that period, the factor repays

the business owner and later proceeds to

collect the money from the debtor.

Factoring is a very common practice in the

Manufacturing Industry. At times the

Manufacturing Unit does not have sufficient

cash to buy raw materials. At such times, they

borrow it ad when they have the required

credit, they pay it back. In a similar manner,

when the raw material supplier need

anything from the manufacturing unit but are

short of the requisite credit, they may also

take similar Factoring approach.

The concept of Accounts Receivable

Factoring had, in all likelihood originated in

the ancient Mesopotamian culture. In fact the

rules of Factoring were also preserved under

the Code of Hammurabi.

For further information about Accounts

Receivable Factoring visit:

http://www.sterlingcommercialcredit.com