Factoring

Factoring sounds quite complicated in that it might remind you of doing maths at school and working out what the factors of a number are! However factoring in finance refers to selling accounts receivable to a third party, and that third party is known as a factor, hence factoring overall.

Why might this be a good idea? Well, it spreads the risk to the factor as they take on the risk of collecting, which therefore means there could be losses. If done without recourse, the factor takes on the risk of nonpayment. Often factoring happens at a discount, where the factor pays a discounted price prior to maturity.

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