Factoring is a service involving the purchase by a financial institution, called a Factor, of receivables due to exporters / suppliers (sellers) by their customers (buyers), with the Factor assuming full credit and collection responsibilities.
In other words, Factoring is a financial transaction whereby an exporter/supplier sells its accounts receivable (i.e. invoices) to a third party (called a Factor) at a discount in exchange for immediate cash with which to finance continued business.
The Factor performs at least two of the following functions on behalf of the seller:
• Credit Protection,
• Prepayment against accounts receivable,
• Collection of factored debt,
• Credit management and sales ledger administration and analysis.
How does that Work?