Loan Overview

In simple terms, factoring is the sale of accounts receivable to a factoring company, called a “factor,” for a percentage of its value. The factor then collects payment on the account instead of the original company. Once the account is paid, the factor recoups the amount they paid out to the original company, plus a small fee. The factor then forwards the remaining amount to the original company. Factoring is a fast, easy way for businesses to get paid now for what their clients owe, instead of waiting until the payment due date. It helps manage the cost of materials and labor for incoming orders. It can also help a company cover short-term expenses that come due before they’ve received their payments from clients.

As an example, a client owes Company A $10,000 on an invoice. Company A sells that invoice to a factor for 80% of its value, meaning the factor gives $8,000 in cash to Company A. The client pays their invoice of $10,000 directly to the factor. The factor takes out their $8,000 plus a 3% factoring fee, which comes to $240. Then, the factor sends Company A the remaining $1,760. The client isn’t affected by the transaction between Company A and the factor, except to send payment to a new address.