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How does a factoring finance arrangement work?


A factoring finance arrangement is a way for businesses to free the cash tied up in unpaid invoices. And the process is actually very simple. Once a business has provided goods or services to another business an invoice can be raised. As long as there is an existing contract with a factoring company (a factor) the invoice is sold to them. The factor immediately pays around 85-90% of the invoice total as an advance rate back to the business, issues a statement to the customer (the account debtor), collects payment and takes care of the sales ledger and bookkeeping. Once payment has been received, the factor will take their percentage or fee and any remaining money can be released from the invoice. However, if payment cannot be recovered, the money will either have to be paid back to the factor (recourse contract) or the factor will take on the debt themselves (non-recourse contract).

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An additional question: Respond to this Question

  • Why turn to a factor rather than seek a bank loan?
  • Who collects the debt due, the factor or my business?
  • What's the difference between factoring with recourse and factoring without recourse?
  • Does factoring require a minimum number of invoices?
  • What does a factoring company do in the case of nonpayment?
  • Do my customers know of the factor’s involvement?
  • What are the requirements for invoice discounting?
  • Is there any collateral requirement for factoring?
  • How quickly can I access cash for the invoices I sell to a factor?
  • Who do I turn to if I have a dispute with my factoring company?
  • I have overseas clients; can I factor international invoices?
  • Is it easy to terminate a factoring arrangement?
  • What regulations apply to factoring companies?
  • What does working capital mean to your business?
  • What is the difference between factoring and bill discounting?
  • What is credit insurance?
  • What is export factoring?
  • What is the difference between invoice factoring and merchant cash advance?
  • What is the difference between factoring and securitisation?