Principles of factoring and invoice discounting

Factoring is the purchase by the factor and the sale by a company (the “customer”) of book debts on a continuing basis, usually for immediate cash. The sales accounting functions are then provided by the factor who manages the customer’s sales ledger and the collection of accounts under the terms previously agreed between the customer and its clients.  The factor may assume the credit risk for accounts within agreed limits (non-recourse), or this risk may be retained by the customer (recourse).

Invoice discounting is an arrangement similar to recourse factoring, where the customer retains responsibility for administering its sales ledger, maintaining books of account, and collecting outstanding debtors for the account of the invoice discounter. The debtor is usually unaware of the arrangement, described as confidential invoice discounting, or, if the debtor has been notified of the arrangement, this is described as disclosed invoice discounting.

Typically, a company can draw up to 80% of a gross invoice on presentation of that invoice to the factor. The balance becomes payable when the invoice monies are received.

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Factoring, in one form or another, has been around for thousands of years. Factoring releases the funds locked up in outstanding sales invoices, is a sure-fire way to turn your outstanding debtors into cash. Factoring is frequently used by businesses to improve cash flow. It can also be used to decrease administration expenses.
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