Factoring is a receivable management service wherein the seller encashes against his credit sales. Factor makes pre-payment to the seller after deducting some margin, against production of sales invoices, collects the money from the purchaser on the due dates and pays balance amount to the seller after deduction of some charges.
Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. In “advance” factoring, the factor provides financing to the seller of the accounts in the form of a cash “advance,” often 70-85% of the purchase price of the accounts, with the balance of the purchase price being paid, net of the factor’s discount fee (commission) and other charges, upon collection. In “maturity” factoring, the factor makes no advance on the purchased accounts; rather, the purchase price is paid on or about the average maturity date of the accounts being purchased in the batch. Factoring differs from a bank loan in several ways.