Factoring
This article is about the financial term. For factoring of integers, see integer factorization.
In corporate finance, Factoring is the business of a company (factor) that buys a manufacturer's invoices at a discount and takes responsibility for collecting the payments due on them. This process brings cash to the manufacturer due from the customer, sooner than the terms that the invoice would normally allow. Typically, most invoices are factored at fee anywhere from 1.67% for each 10 days in the terms (5% for every 30 days) to 8% or even 10% of the principle amount, depending on the relative credit worthiness of the customer who is the payor on the original invoice. Most factoring businesses will limit their transaction amount to no more than $100,000 but with generally no set minimum transaction amount.
There are usually four parties involved when an invoice is factored:
- Seller of the product or service who originates the invoice.
- Payor and recipient of the invoice (and associated product and/or service) who promises to pay the balance due within a set terms (typically anywhere from 10 to 30 days).
- Broker who is approached by the Seller to wishes to receive funds ahead of the Payor terms.
- Funder who supplies the actual hard cash to complete the transaction. Quite often, the Broker and Funder are the same entity. However Brokers will also work with separate Funder taking a commission.
Typically, the Funder as the chief risk taker in this transaction receiving the Lion's share of the fee. A Broker will then typically receive as payment typically 10% of the funding fee.