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What is Factoring?
Home » Accounting » Factoring » What is Factoring?Factoring is a type of financing strategy in which a company sells accounts receivable to another company, known as the factor, in order to receive immediate funds. Factors normally pay the original owner of the accounts receivable an amount between 70-90% of the invoice value; another payment is made after the factor successfully collects the invoice. Factoring fees vary based upon the specific transaction and the policies of each factor, but a charge of 5% of the invoice value each month is relatively common. Factors also charge administrative fees for the various invoices they collect.
At first glance factoring may appear similar to a traditional bank loan, but there is an important difference between the two. Whereas traditional lenders usually take a security interest in the assets of their clients, factors actually take ownership of the accounts receivable after purchase. The factor then assumes responsibility for the collection of the account.
Although the names given to factoring agreements vary from industry to industry, there are two basic types of factoring agreements: recourse agreements and non-recourse agreements. In a recourse agreement, the original owner of the accounts receivable and the factor agree that the factor may demand payment from the original account owner if the factor is unable to collect payment. In a non-recourse agreement, the factor may only look to the company to whom the invoice was originally sent.
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