Debt Factoring

Debt factoring is a transaction in which a business sells its accounts receivable at a discount. The company purchasing the accounts receivable is know as a factor. The factor then collects the outstanding amounts from the businesses customers.

This is also referred to as accounts receivable financing or factoring.

Businesses will often enter into factoring arrangements in order to improve cash flow and shorten the cash cycle. The business receives immediate cash from the factor and does not need to wait to collect the money from its customers.

Factoring does have disadvantages. The accounts receivable must be sold at a discount. Other means of financing may be available at lower costs. Another disadvantage is that collection actions taken by the factor may harm relationships with customers.