Transaction Factoring

Transaction factoring is a form of financing where a business sells its accounts receivables (transactions) at a discount to a third party, or “factor.” For small- to mid-sized companies, this is a cost-effective way to maintain cash flow without having to wait for customer payment.

Like a bank line of credit, factoring temporarily boosts a company's working capital; factoring, however, involves no repayment. The factor purchases the transactions outright for less than value, then collects payment directly from each customer. Once an invoice’s value has been recovered the original merchant will receive the difference between the discounted price and the invoice amount, minus a fee.

If the payment cannot be collected for some reason, the factoring company must accept the loss. For that reason, factors will typically run customer credit checks before accepting an invoice.

While there are similarities, factoring companies are not the same as collection agencies, who deal with accounts which are older (often 90 days or more), charge a higher fee, and give the merchant nothing until the invoice is collected.