Legal Definitions - factoring

Factoring is when a company sells its accounts receivable to another company, called a factor, for a lump sum of money. The factor then collects the money owed by the accounts and keeps a percentage as profit.

For example, let's say a small business has $50,000 in accounts receivable from various customers. They need cash immediately to pay for expenses, so they sell their accounts receivable to a factor for $40,000. The factor then collects the $50,000 from the customers and keeps a percentage, say 10%, as profit. The small business gets the cash they need right away, and the factor makes a profit from collecting the money owed.

Another example could be a clothing manufacturer who sells their products to a department store. The department store agrees to pay in 60 days, but the clothing manufacturer needs cash now to pay for materials and labor. They sell their accounts receivable to a factor for a lump sum of money, and the factor collects the money owed by the department store in 60 days.

Overall, factoring allows companies to get immediate cash for their accounts receivable, while the factor makes a profit from collecting the money owed.