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Information > Financial Terms > This page Factor An accounts receivable
financing institution. The
essence of factoring in the financial sense is the discounting of acceptable
accounts receivable on a nonrecourse, notification basis.
Accounts receivable are sold outright to the factor, who assumes
the full risk of collection and credit losses, without recourse to the
firms discounting the receivables in the event of loss. Customers are notified to remit directly to the factor.
Thus firms using a factoring service avoid the tying up of working
capital cash in accounts receivable for the full credit period and in
addition eliminate the necessity for credit and collection departments.
Firms using a factoring service have the privilege of drawing on
the net cash proceeds of discounting of the accounts receivable, before
the average due date thereof, in which case interest is paid (usually
2% to 3% above the New York bank price rate), or at the average due date,
in which case no interest is charged (instead the factor will pay interest
at an agreed rate, usually 2% below the New York bank price rate).
Factors, however,
are usually more than merely receivables financing institutions.
Other credit extended may include loans on inventories, fixed assets,
and other forms of security, as well as unsecured credit.
Moreover, factors are uniquely qualified to render valuable advisory
services to clients by reason of their long identification with and knowledge
of the lines they finance, including advice on budgeting, planning, operations,
styling and mechandising, and purchasing. In addition to charging
interest on cash availability before average due date of receivables discounted,
factors charge a commission, ranging from less than 1% to 1.5% of the
gross amount of invoices. Factors particularly
have been identified with the development of the textile industry, but
factoring services in recent years have been extended to a variety of
other lines. BIBLIOGRAPHY MALTY, T.D.
"Export Factoring Moves into the Spotlight."
Global
Trade,
July, 1989. NICHOLS,
D.
"Factors That Let the Cash Flow."
Venture, June-July, 1989. |