Account Receivable Factoring
Factoring is the term used for financing a company when it pledges its receivables (the amount owed to the borrowing company from its customers) to a third-party company for immediate cash. With invoice or receivables factoring, the factor company advances funds to a borrowing company secured by the amount owed to the borrowing company by their customers.
The lending company will receive the payments made to a borrowing company from their customers. At that time, they will withhold their fees for the transaction and remit the balance to the borrowing company. The lending (or factoring) company will charge a rate that comprehends, but not limited to, the duration the funds were outstanding.
In addition, factoring may also include a credit management service which assists companies in determining which of their clients deserve credit. Finance companies that offer factoring will engage into the transaction “with recourse” or “without recourse”. Recourse means that if the client of the borrower doesn’t pay the factoring company after a period of time, the borrowing company must reimburse the lending company for the non-payment by its customer.