Financial Information
Factoring is? (Source of external financing)?
Reply from
elvis john
sale of a business accounts receivables to a factor to obtain working capital or financing requirements. Factoring has many names. You may hear it called factoring factoring invoice factoring invoice factoring and invoice discounting factoring.
elvis is right. Let me just add a bit about why companies do this.
If Company ABC has 100,000 of accounts receivable, there is a good chance that some of that money will never be collected. A variety of factors might make it difficult to collect some of the money. Or the money might take an excessively long period of time to collect. Company ABC estimates that 15% is not collectible, so they end up with a net asset of 85,000.
Now let’s say Company XYZ thinks ABC is wrong about its estimate on collectibility. XYZ believes that only 10% of the 100,000 is not collectible. Perhaps XYZ has a better collection mechanism, or has different information about some of the companies owing ABC money. XYZ might propose to purchase ABC’s receivables for 87,000. ABC agrees, since 87k is more than the 85k they expect to collect. XYZ is happy, since they believe they can collect 90k.