Factoring is a financing solution: a company sells its accounts receivable to a specialized organization, known as a factor. The factor advances the money to the company immediately, minus a commission, and then handles the collection of the invoices.
Example
An SME assigns €100,000 in invoices with a 60-day payment term. The factoring company quickly pays the SME the majority of this amount. When the invoices are due, the customers pay the factoring company.
Why It’s Important
Factoring quickly improves cash flow without having to wait for payments. It comes at a cost and requires properly prepared invoices and tracking: collection software makes this tracking easier.
For more information: The Guide to Credit Management, Cash Flow, and Working Capital Optimization.
See also: factor, assignment of receivables, deconsolidated factoring.
