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36 What is a factor as defined within the Finance Company terminology:

36 What is a factor as defined within the Finance Company terminology:

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Answer #1

When a business sells its receivables/bills to a third party at a discount to get money for working capital is called factoring. While the third party who buys the receivables is called factor.

So for example a Company A has sold some products of $ 1000 to Company B on credit but Company A needs money to finance its Working Capital so he calls up the bank sets a deal to sell those receivables to the Bank. Bank will buy it at a discount (for e.g. 5%) then the Bank will pay $950 to Company A and get bills in return. The Bank will then receive $1000 from Company B according to the terms set during the initiation of factoring.

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