Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Factor

What it is:

A factor is a financial institution that purchases receivables from a company.

How it works (Example):

Let's say Company XYZ sells widgets. It has about $1 million in receivables from customers who have not paid for their widgets.

Company XYZ needs cash right away because it is trying to finish building a new factory. It calls a factor, which purchases the receivables for $750,000. In the deal, Company XYZ gets $750,000 right away, and the factor gets the right to all the money from the receivables ($1 million). The factor then assumes the risk of customers paying late or not at all.

Why it Matters:

Factors and factoring can be complicated, but the basic idea is that companies can trade cash flows later for cash flows now, which is useful for companies that need cash right away. It can also be expensive, as the example shows (Company XYZ gave up $250,000 of its receivables for the deal).

Because factors assume the risk of collecting the receivables, they are choosy about which companies they work with and the creditworthiness of the companies' customers.
 

Related Terms View All
  • Auction Market
    Though most of the trading is done via computer, auction markets can also be operated via...
  • Best Execution
    Let's assume you place an order to buy 100 shares of Company XYZ stock. The current quote...
  • Book-Entry Savings Bond
    Savings bonds are bonds issued by the U.S. government at face values ranging from $50 to...
  • Break-Even Point
    The basic idea behind break-even point is to calculate the point at which revenues begin...
  • Calendar Year
    If Company XYZ starts its fiscal year on January 1 and ends its fiscal year on December...