Business factoring is the sale of a financial asset belonging to a company to a third party. The reason for this transaction is the acquisition of cash flow. This enables the business to continue to trade in a cash rich way. This type of business method is chosen by a company for two reasons. The first is that the firm does not have to have a credit check undertaken, the transaction is based purely on the value of the asset. The second is that instead of acquiring a loan, the company sells an asset. A factoring transaction involves three legal people, the owner of the asset e. G. An invoice, the debtor, the person who owes the debt, and the factor, the third party.

Factoring and a method called forfaiting are often confused. However factoring is the sale of all of the receivables whereas in forfaiting, only a part of the receivable is sold. Factoring is also used when the practice of discounting invoices is used but this term is coined erroneously. I it involves loaning the money from a third company and using the asset as collateral.

As mentioned there are three parties that are directly involved within factoring; the seller of the receivable, the debtor, the one who owes the receivable and the factor. The receivable is a financial asset usually connected with the debtor’s liability to pay the amount owed to the seller. This is generally a payment or a service received or a product purchased. The seller of the receivable then sells this financial asset to the third party, the factor, at a discounted rate to obtain cash immediately. This transaction effectively passes the ownership of receivable to the factor, including all of the rights and potential losses that are associated with that asset.

When the factor has received all the rights of the asset, they are able to receive all payments made by the debtor thereafter. The debtor will be informed that the third party now holds the debt and that they are responsible for collecting and billing it. If the debtor is unable to pay the debt then the third party will incur the losses arising form it.

If the seller receives payment from the debtor after the third party has acquired the rights to the asset, then the seller may be at risk from further cash advances by the factor. These assets are the factor’s property.

There are generally three main parts to a transaction involving business factoring. The advance, which is a partial payment that is made to the seller after the agreement of terms of the deal which represents a small percentage of the asset.

The second is the reserve. It is the total amount left from the asset after the deduction of the advance wherein this amount is held by the third party until the payment is made by the debtor.

The third is the fee, the fee occurs from the costs involved with the factor retrieving the money from the debtor. The fees incurred will be subtracted from the debt repaid to the seller.

It is not uncommon in business factoring for the factor to charge the seller a service charge. Such charge could also be demanded regardless of whether the seller has paid interest to the factor if the factor has had to wait for payments from the debtor.

Business factoring is a process whereby a business sells its assets to a third party such, assets such as invoices, for a discounted fee in order to provide itself with immediate funds. We have got the inside info on factoring companies and factoring business .