Factoring is the selling of the business’s receivables to a factoring company. The factoring company or the Factor pays the business a specific percentage of the value of the accounts receivable and deducts a small fee being the cost incurred for collection of payment on maturity.
As the Factor collects the receivables instead of the business, one way to look at factoring is that a business is outsourcing its receivables collections process. Based on specific country regulations, factoring could be with OR without recourse.
If the factoring is done without recourse, it would become an ‘off-balance sheet finance’.
Did you know that – “In Factoring, generally a maximum of 80% of the value of receivables is paid to the business and is normally availed for shorter durations ranging from 30 days to 180 days”!!!