Account receivable factoring

Factoring is an arrangement to have debts collected by a factor company, which advances a proportion of the money it is due to collect. Some companies use factoring to help short-term liquidity or to reduce administration costs.

The benefits of factoring include the following:

1. The company does not incur the costs of running its own sales ledger department, and can use the expertise of debtor management that the factor has.

2. The company can pay its suppliers promptly, and so be able to take advantage of any early payment discounts that are available.

3. Managers of the company do not have to spend their time on the problems if slow paying accounts receivable.

The disadvantage is that credit customers will be making payments direct to the factor, which is likely to present a negative image of the company’s attitude towards customer relations.

The main aspects of factoring include:

1. Making payments to the client in advance of collecting the debts. This is referred to as‘factor finance’, because the factor is providing cash to the client against outstanding debts;

2. Administration of the client’s invoicing, sales accounting ad debt collection service;

3. If factor takes over the risk of loss from bad debts, it is known as non-recourse service.