Factoring In Accounting

Determining whether "factoring" is a good investment for a company will depend on many factors, particularly the company specifics, such as the type of business and its financial condition. Generally, factoring is a good investment choice for a business, as it increases liquidity, increases competitiveness, improves cash flow, is efficient, removes the need for good credit, and reduces the reliance on traditional debt."}},"@type": "Question","name": "How Does Factoring Work?","acceptedAnswer": "@type": "Answer","text": "A company that has accounts receivables is waiting on payment from its customers. Depending on the company's finances, it may need that cash to continue operating its business or funding growth. The longer it takes time to collect the accounts receivables, the more difficult it is for a business to run its operations. Factoring allows a company to sell off its receivables at one time rather than having to wait on collecting from customers. The receivables are sold at a discount, meaning that the factoring company may pay the company with the receivables 80% or 90%, depending on the agreement, of the value of the receivables. This may be worth it to the company in order to receive the influx of cash.","@type": "Question","name": "How Much Money Do You Need to Start a Factoring Company?","acceptedAnswer": "@type": "Answer","text": "Depending on the type of factoring company you wish to start, your start-up costs will range from $1,135 to $23,259."]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsWhat Is a Factor?Understanding a FactorRequirements for a FactorBenefits of a FactorExample of a FactorFactor FAQsCorporate FinanceFinancial AnalysisFactor Definition: Requirements, Benefits, and ExampleByAdam Barone Full Bio LinkedIn Twitter Adam Barone is an award-winning journalist and the proprietor of ContentOven.com. He has 5+ years of experience as a content strategist/editor.Learn about our editorial policiesUpdated March 31, 2022Reviewed byMargaret James Investopedia / Sydney Burns

factoring in accounting

Determining whether "factoring" is a good investment for a company will depend on many factors, particularly the company specifics, such as the type of business and its financial condition. Generally, factoring is a good investment choice for a business, as it increases liquidity, increases competitiveness, improves cash flow, is efficient, removes the need for good credit, and reduces the reliance on traditional debt.

A company that has accounts receivables is waiting on payment from its customers. Depending on the company's finances, it may need that cash to continue operating its business or funding growth. The longer it takes time to collect the accounts receivables, the more difficult it is for a business to run its operations. Factoring allows a company to sell off its receivables at one time rather than having to wait on collecting from customers. The receivables are sold at a discount, meaning that the factoring company may pay the company with the receivables 80% or 90%, depending on the agreement, of the value of the receivables. This may be worth it to the company in order to receive the influx of cash.

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount.[1][2][3] A business will sometimes factor its receivable assets to meet its present and immediate cash needs.[4][5] Forfaiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfaiter.[6] Factoring is commonly referred to as accounts receivable factoring, invoice factoring, and sometimes accounts receivable financing. Accounts receivable financing is a term more accurately used to describe a form of asset based lending against accounts receivable. The Commercial Finance Association is the leading trade association of the asset-based lending and factoring industries.[7]

There are three parties directly involved: the factor who purchases the receivable, the one who sells the receivable, and the debtor who has a financial liability that requires him or her to make a payment to the owner of the invoice.[1][2] The receivable, usually associated with an invoice for work performed or goods sold, is essentially a financial asset that gives the owner of the receivable the legal right to collect money from the debtor whose financial liability directly corresponds to the receivable asset.[4][2] The seller sells the receivables at a discount to the third party, the specialized financial organization (aka the factor) to obtain cash.[1][4][2] This process is sometimes used in manufacturing industries when the immediate need for raw material outstrips their available cash and ability to purchase "on account".[12] Both invoice discounting and factoring are used by B2B companies to ensure they have the immediate cash flow necessary to meet their current and immediate obligations.[5][2] Invoice factoring is not a relevant financing option for retail or B2C companies because they generally do not have business or commercial clients, a necessary condition for factoring.

The sale of the receivable transfers ownership of the receivable to the factor, indicating the factor obtains all of the rights associated with the receivables.[1][2] Accordingly, the receivable becomes the factor's asset, and the factor obtains the right to receive the payments made by the debtor for the invoice amount, and is free to pledge or exchange the receivable asset without unreasonable constraints or restrictions.[1][2] Usually, the account debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections; however, non-notification factoring, where the client (seller) collects the accounts sold to the factor, as agent of the factor, also occurs. The arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor.[10] If the factoring transfers the receivable "without recourse", the factor (purchaser of the receivable) must bear the loss if the account debtor does not pay the invoice amount.[1] If the factoring transfers the receivable "with recourse", the factor has the right to collect the unpaid invoice amount from the transferor (seller).[1] However, any merchandise returns that may diminish the invoice amount that is collectible from the accounts receivable are typically the responsibility of the seller,[1] and the factor will typically hold back paying the seller for a portion of the receivable being sold (the "factor's holdback receivable") in order to cover the merchandise returns associated with the factored receivables until the privilege to return the merchandise expires.

Factoring is a method used by some firms to obtain cash. Certain companies factor accounts when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts; in other industries, however, such as textiles or apparel, for example, financially sound companies factor their accounts simply because this is the historic method of financing. The use of factoring to obtain the cash needed to accommodate a firm's immediate cash needs will allow the firm to maintain a smaller ongoing cash balance. By reducing the size of its cash balances, more money is made available for investment in the firm's growth. 041b061a72