In a factoring transaction, the seller (you) is called the "debtor" and the factor is called the "creditor." The factor pays you for your invoices immediately and then collects from your customers. So, in effect, you're selling debtors and buying creditors.
The customer who buys goods or services from you is also known as an "assignee." The assignee usually pays directly to their bank or credit union with either cash or a bank check. The assignee's bank makes payments due on accounts payable to your factor on behalf of its customer (the assignee). In other words: if someone owes money to your business but doesn't have enough cash on hand to pay their bill right away, they will borrow money from their own bank so they can pay you in full when it comes due without getting into any financial trouble themselves.
Factoring is a simple concept, but it can be complex. Factoring finance is not just for large companies and manufacturers; small businesses also use it to generate cash flow. If you’re looking for an alternative to traditional bank loans, factoring may be the answer. |
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