What is factoring?
Factoring is a process of current asset lending towards account receivables. Basically it is a service, which works to improve company’s cash flow and its base principle is to transfer money (account receivables) to a factoring company, receiving immediate payment. Besides, factoring gives an opportunity to receive financing without direct warranty with the account receivable or buyer’s funds as the only pledge. Therefore, the use of factoring and account discounting services ensures cash flow and eases its planning, decreases customer service’s and administration expenses as well as reduces possible account receivable’s risk, allowing a company to direct more resources in its core operations.
Factoring includes financing, administration and monetary claim rights’ transfer from buyers as well as risk reduction in case of bill’s non-payment.
Basically every factoring core operation plan is as follows:
- a seller transfers good or service to a number of buyers
- the seller transfers yet not paid copy of the bill to a leasing company
- the leasing company pays the deposit to the seller in range of 80-95% from the total bill amount
- after a while leasing company receives 100% bill payment form buyers
- leasing company pays buyer the reserve (10-20%) minus loan interest