Factoring

What is Factoring?

‘Factoring’ is a term which is used in business for the process whereby a company sells either future receivables (such as incoming credit card payments) or debts (such as due account payments) to a third party which pays money in exchange for entitlement to the owed or paid amount. Factoring is offered by a number of money service businesses, and some may also offer other services such as debt collection, whereby payments are collected on behalf of a company, rather than bought outright.

Debt Factoring versus Collection

There are pros and cons to both debt factoring and debt collection, but both can be useful. While debt factoring can help a business to maintain cash flow, often the amount paid or the debt is lower than its actual value, due to the risk involved for the buyer. Debt collection on the other hand provides the business with the full amount, although a commission based on a fixed percentage of every amount recovered may be the method in which the debt collection agency is paid. Both are preferable to handling late payments via legal action, as this is time consuming and more expensive.