Factoring for individuals who have funds available and can “wait” for the return on investment may wish to consider factoring. In simple terms, a factor (e.g., individual or entity) is a financial third party who will purchase some or all of a company’s account receivables. These receivables will be purchased at a discounted, agreed-upon value.
Why would a company want to sell their receivables?
While many people would believe this to be expensive for the company, there are some benefits to the company selling the receivables which include: 1) companies who’s account receivables take a longer time to be paid, and 2) a company that is growing fast needs the money on those receivables to fund other opportunities or pay on-going responsibilities and need the cash now vs. later.
An example of factoring may involve a company that is selling accounts receivables of $1,000,000. The factor may purchase these receivables for a discounted “factored” amount and then pay the majority of the receivables to the company. Upon payment of the receivables, the balance less commissions and fees retained by the factor will be paid to the company. Factoring fees may typically range between 4 – 6%.