Factor
 |
Definition of 'Factor'A financial intermediary that purchases receivables from a company. A factor is essentially a funding source that agrees to pay the company the value of the invoice less a discount for commission and fees. The factor advances most of the invoiced amount to the company immediately and the balance upon receipt of funds from the invoiced party. |
 |
Investopedia explains 'Factor'For example, assume a factor has agreed to purchase an invoice of $1 million from Clothing Manufacturers Inc., representing outstanding receivables from Behemoth Co. The factor may discount the invoice by say 4%, and will advance $720,000 to Clothing Manufacturers Inc. The balance of $240,000 will be forwarded by the factor to Clothing Manufacturers Inc. upon receipt of the $1 million from Behemoth Co. The factor's fees and commissions from this factoring deal amount to $40,000.Note that the factor is more concerned with the creditworthiness of the invoiced party - Behemoth Co. in the example above - rather than the company from which it has purchased the receivables (Clothing Manufacturers Inc. in this case). Although factoring is a relatively expensive form of financing, factors provide a valuable service to (a) companies that operate in industries where it takes a long time to convert receivables to cash, and (b) companies that are growing rapidly and need cash to take advantage of new business opportunities. |
Related Definitions
Articles Of Interest
-
Small Business: Speed Up Receivables To Avoid A Cash Crunch
Waiting for customers to pay can be a losing game. Look to factoring for quicker cash. -
Measuring Company Efficiency
Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period. -
Company Survival: Cash Conversion Cycle Is Key
Find out how to use this figure to analyze a firm's financial condition. -
What happens if a company doesn't think it will collect on some of its receivables?
The accounts receivable account, or receivables for short, is created when a company extends credit to a customer based on a sale. However, there are times when a company will not collect on ... -
Pay Attention To The Proxy Statement
Don't overlook this overview of a company's well-being. -
Explaining Amortization In The Balance Sheet
Amortization is important to account for intangible assets. Read to find out more about amortization. -
Key Steps To Building A Great Financial Planning Practice
Following the status quo will kill your financial practice. Find out the tips you need to follow to keep you a step or two ahead of the competition. -
Understanding Off-Balance Sheet Financing
For anyone who was invested in Enron, off-balance sheet (OBS) financing is a scary term. Off-balance sheet financing means a company does not include a liability on its balance sheet. It is ... -
Top 4 Most Competitive Financial Careers
If your goals include a big paycheck and working for a Wall Street firm, then you need to learn how to meet employers' expectations. -
A Day In The Life Of A Public Accountant
Here's an inside look at the workdays of two experienced CPAs, to give you an idea of what it might be like to pursue a career as a public accountant.
Free Annual Reports