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.
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