Through factoring, a company sells its accounts receivables to another company that is contracted to collect them. The accounts receivables are invoices that represent sales or services provided to suppliers or customers that can be both inside and outside the country.

The company gives all the invoices that will be collected by the factor. Through Factoring, this company would receive an anticipated amount of money of a percentage of the invoices given to the factoring company. The latter will have the exclusive rights of collection and will handle all accounts receivables.

The factor will be paid a commission in exchange for the collection of the invoices. If under any circumstances, the invoices do not get collected the factoring company will cover all expenses.

Factoring is provided by specialized institutions. Many banks have subsidiaries that specialize in factoring.

Factoring companies do not often take all of the accounts receivables of a company but only those within a limit.

The factor provides three services: Financing of the client (in advance of delivery of a check); Management of debt recovery (this is the factor which is responsible to recover the amount of invoices); and Guarantee of payment of the latter (if unpaid, the risk is borne by the factor).

Factoring is become very popular amongst small entrepreneurs, because of this reason some of them have decided to set restrictions of the amounts paid when customers do not pay.

Factoring has three main advantages:

Firstly the fact that Factoring relieves the company from the stress of having to deal with the collection process. They do so by using their expertise and appropriate technology that ensures effective payment by the customers. The most important one is that through factoring the company is guaranteed to receive an amount even if the customer fails to pay.

Factoring has some advantages:

Providing the total outsourcing of the client, the factor allows the company to make significant economies of scale: one on staff costs, and on the cost of insurance and the costs of bank financing.

Factoring allows companies to improve the planning of their income given that they would receive the amount agreed on the accounts receivable regardless of whether the customer pays or not.

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