Factor

AAA

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 TERMS
  1. Accounts Receivable (A/R) Discounted

    Outstanding invoices representing money owed to a creditor which ...
  2. Invoice

    A commercial document that itemizes a transaction between a buyer ...
  3. Receivables

    An asset designation applicable to all debts, unsettled transactions ...
  4. Accounts Receivable - AR

    Money owed by customers (individuals or corporations) to another ...
  5. Operating Cost

    Expenses associated with administering a business on a day to ...
  6. Path To Profitability (P2P)

    A clearly defined route to profitability as described in a business ...
RELATED FAQS
  1. 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 ... Read Full Answer >>
  2. What are some of the advantages and disadvantages of absorption costing?

    Companies must choose between using absorption costing or variable costing in their accounting systems. There are advantages ... Read Full Answer >>
  3. What is the difference between the cost of capital and the discount rate?

    The cost of capital refers to the actual cost of financing business activity through either debt or equity capital. The discount ... Read Full Answer >>
  4. Why does zero-based budgeting require ongoing evaluation and management?

    Zero-based budgeting must have ongoing evaluation and management due to the fact a zero-based budget requires management ... Read Full Answer >>
  5. What is the prime cost formula?

    The term "prime cost" refers to the direct costs of manufacturing an item. It is calculated by adding the cost of raw materials ... Read Full Answer >>
  6. How can I lower my effective tax rate without lowering my income?

    There are lots of ways to lower your effective tax rate, although your individual circumstances determine whether you can ... Read Full Answer >>
Related Articles
  1. Fundamental Analysis

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  2. Entrepreneurship

    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.
  3. Markets

    Company Survival: Cash Conversion Cycle Is Key

    Find out how to use this figure to analyze a firm's financial condition.
  4. Investing

    The Top 6 Companies Owned By Apple

    Let’s take a look at six of the more notable acquisitions that Apple has made over the years.
  5. Investing Basics

    Explaining Write-Downs

    A write-down is a reduction in the book value of an asset because it is overvalued compared to the market value.
  6. Personal Finance

    How Amazon Fresh Works

    Amazon Fresh, a grocery delivery company that operates in parts of Seattle, Los Angeles, New York, and New Jersey, is a new service from Amazon.
  7. Personal Finance

    The Top 6 Companies Owned By Google

    Google owns an incredible number of companies. These are its top six acquisitions.
  8. Entrepreneurship

    Spotify's Agile Management

    Spotify’s entire business structure has maintained an agile mindset despite having 30 teams spread across three cities.
  9. Investing

    The Top Non-Soda Companies Owned By Coca-Cola

    Coca-Cola has turned to acquisitions for growth and diversification, becoming a nonalcoholic beverage conglomerate that now owns, licenses and markets more than 500 beverage brands.
  10. Professionals

    Why Advisors Should Focus on Relationships

    Successful financial advisors share a secret: It's about the people, not the numbers.

You May Also Like

Hot Definitions
  1. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  2. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  3. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  4. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  5. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  6. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
Trading Center