Factoring (1 Viewer)

St3ph3n

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Hey all!

What is factoring, I'm trying to understand it buuutttt I don't get what it does.

Its short-term finance.. it can improve cash flow (dunno how) somehow by using the 'unpaid invoices of a business as security' <-- dunno what that is.

It says, Factoring is the cash sale of a business's accounts receivable (or trade debtors) which is kinda confusing

thanks peepz
 

St3ph3n

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Thanks for answering, ok so
Accounts receivable --> what customer owes the business
Factoring businesses come in when customers are unable to pay off quickly and the business which the customer owes money needs funds, it will go to factoring businesses where they buy the unpaid invoices to meet short term payments!?

I hope I processed that correctly, anyways thanks alot!
 

seremify007

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In short, it's the sale of receivables to a third party. In simple English, it's the sale of the right to money owed to you (essentially someone has given you an IOU) to someone else. Typically that someone else (a factoring company) gives you cash now but they buy it from you for less than the amount of the debt (i.e. a discount) to cover them for the timing (i.e. they won't get their money immediately) and the risk (i.e. the person may never pay).

Funnily enough I work in the industry which involves the sale of mortgages and it's quite an interesting industry particularly with the discounting as well as the credit risk associated with these products.
 

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