What is a Factor?
A factor is a financial institution that purchasesfrom a company.
How Does a Factor Work?
Let's say Company XYZ sells widgets. It has about $1 million infrom customers who have not paid for their widgets.
Company XYZ needs 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.right away because it is trying to finish building a new factory. It calls a factor, which purchases the
Why Does a Factor Matter?
Factors and factoring can be complicated, but the basic idea is that companies can tradeflows later for flows now, which is useful for companies that need right away. It can also be expensive, as the example shows (Company XYZ gave up $250,000 of its for the deal).
Because factors assume the risk of collecting the