What it is:
A factor is a financial institution that purchasesfrom a company.
How it works/Example:
Let's say Company XYZ sells widgets. It has about $1 million in
Company XYZ needs 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 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
Because factors assume the risk of collecting the , they are choosy about which companies they work with and the creditworthiness of the companies' customers.