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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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