Factor

Source: Encyclopedia of Banking & Finance (9h Edition) by Charles J Woelfel
(We recommend this as work of authority and you can order it here)                  

An accounts receivable financing institution.  The essence of factoring in the financial sense is the discounting of acceptable accounts receivable on a nonrecourse, notification basis.  Accounts receivable are sold outright to the factor, who assumes the full risk of collection and credit losses, without recourse to the firms discounting the receivables in the event of loss.  Customers are notified to remit directly to the factor.  Thus firms using a factoring service avoid the tying up of working capital cash in accounts receivable for the full credit period and in addition eliminate the necessity for credit and collection departments.  Firms using a factoring service have the privilege of drawing on the net cash proceeds of discounting of the accounts receivable, before the average due date thereof, in which case interest is paid (usually 2% to 3% above the New York bank price rate), or at the average due date, in which case no interest is charged (instead the factor will pay interest at an agreed rate, usually 2% below the New York bank price rate). 

Factors, however, are usually more than merely receivables financing institutions.  Other credit extended may include loans on inventories, fixed assets, and other forms of security, as well as unsecured credit.  Moreover, factors are uniquely qualified to render valuable advisory services to clients by reason of their long identification with and knowledge of the lines they finance, including advice on budgeting, planning, operations, styling and mechandising, and purchasing.

In addition to charging interest on cash availability before average due date of receivables discounted, factors charge a commission, ranging from less than 1% to 1.5% of the gross amount of invoices.

Factors particularly have been identified with the development of the textile industry, but factoring services in recent years have been extended to a variety of other lines.

BIBLIOGRAPHY

MALTY, T.D.  “Export Factoring Moves into the Spotlight.”  Global Trade, July, 1989.

NICHOLS, D.  “Factors That Let the Cash Flow.”  Venture, June-July, 1989.

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