Written by Robert Mac
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Factoring is a financing technique where the accounts receivables of one company are sold to a factor, or a firm that specializes in handling these assets. In turn, the factor finances the company selling their accounts receivables; the amount of the financing is less than the face value of the debts, however. Factoring is also known as accounts receivable financing.

Many companies use factoring, and for a number of different reasons. Collecting debts is a tedious job, and some organizations would rather sell what's owed to them at a discounted price than use collection agencies or other methods to recover those debts. Small businesses, for example, may not have the manpower or resources to collect debts, and ultimately pay a factor to do it.

Factoring Turns IOUs into Capital

For a business with assets locked up in accounts receivables, nothing is more frustrating than hounding customers for payment ... and then not receiving it. The focus of the company shifts from production to administration, and both time and resources are lost. There is no way of accurately measuring the mental losses of chasing down overdue bills.

Selling those debts to a factor turns them into capital--without threatening phone calls or letters. Granted, the financing the factor gives isn't the same as the amount of the debts, but that's the price of eliminating the hassle. After paying the company for the accounts receivables, the factor collects cash when the debtors settle their accounts.

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