Factoring is where a business sells its accounts receivable to a Funding Source at a discount. It is not a collection agency.
It is not a loan.
Factoring differs from a loan in three ways:
1. Factoring is a purchase of an asset.
2. Factoring involves three parties: Vendor (Provider of services
or products), Debtor, and Funding Source (Factor). A loan involves two: Vendor and Funding Source.
3. A loan is based on the Vendor’s credit while Factoring is based on the Debtor’s credit and the value of the receivable.
Example:
A Vendor chooses which receivables to sell to the Factor. Within 24 hours of approval, the Factor gives the Vendor 70-85% the worth of said receivables. (The Debtor now owes the Factor, not the Vendor.) Once the Vendor pays off the outstanding receivables, the Factor then reimburses the Vendor up to 99% (less the initial 75-85%) of the original value of the receivables, depending on Debtor’s promptness of repayment.