Is a service whereby a debt factor will take over the responsibility for the collection of monies owed to a business. A fee is charged for this service and is deducted from the debts recovered before payment is made to the debtor. This service is designed to improve the cash flow of a business. The factor might provide:
• sales accounting – including maintaining the sales ledger , invoicing, sending out statements and collecting the debt
• credit management facilities – including assessment of customers’ creditworthiness
• finance against sales invoices – the factor will pay a large percentage of the total on issue of the sales invoice, with the balance being paid when the debtor settles the invoice
Factoring avoids valuable cash resources being tied up in allowing credit to customers. It guarantees a regular cash flow, and can save money that would normally have been spent on administration costs.
This service should not be confused with invoice discounting .