Factoring, also referred to as debtor financing and receivables factoring, is a financial term describing the sale of a businesses accounts receivable to a third party at a discounted price. Factoring can also be described as the sale of a company's debt or invoice to another company. Factoring is a method for relieving debt and providing capital which can be used immediately at the discretion of the debt seller. The buyer of debt is called the 'factor', and is responsible for collecting payment. The factor profits when they collect payment because they bought the debt at a discounted rate and/or are charging fees for taking on the responsibility of collecting debt payment.
Factoring is a financial technique most often used by exporters looking to accelerate their cash flow at a certain period of time. An exporter will work with a financier to gain to a certain percentage of their sale invoices immediately. The financier is responsible for collecting 100% of the value of the sale invoice from the importer and giving the exporter the remainder of their capital from their sales invoice. Financiers charge fees and an agreed upon percentage of the value of the exporters sales invoice for their services.
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