Factoring and Receivable Lending

Factoring is one of the oldest forms of financing, dating back several hundred years from England. A company which is owed money by trade debtors faces the risk of slow payment or default on those debts, which can put strain on its cash flow. One way to mitigate this danger is by 'factoring' the receivables. Factoring is the sale of the account receivable, with or without recourse back to the seller. The buyer or “factor” then collects the account directly from your customer. This form of financing may allow the borrower to grow his/her business rapidly and/or take advantage of trade discounts to offset the cost of the factoring charges. Many times this form of financing is used in conjunction with Purchase Order Financing. This type of financing is best suited to a company that has sales with strong gross margins. It is not a form of financing to use for an extended period of time since there are usually more efficient options for most borrowers. Since factors are purchasing the receivable and relying on the creditworthiness of the company paying the receivable, factoring can also handle foreign receivables and concentration issues. This allows factors to work with companies that are more financially challenged than traditional lenders would accept.