Factoring improves a supplier’s cash flow. This is how …
Traditional supplier/buyer interaction
- A supplier makes a shipment or delivery and sends an invoice to the buyer.
- The buyer has the option to pay for the goods by the due date on the invoice or, in many cases, to pay the invoice earlier at a discount.
Enter: Factoring
Factoring improves a supplier’s cash flow. This is how …
- The supplier makes the delivery and then sells its invoice(s) or accounts receivable (AR) to a third party, often a bank or financial institution, known as a factor.
- The supplier receives a discounted portion of cash in advance of actual payment of the goods from the buyer.
- The factor receives a fee, often retaining a discounted portion of the gross invoice once it is paid.
- The fee to the factor covers its cost of processing invoices and collecting payments, as well as its lending cost of funds.
Source: https://www.freightwaves.com/news/what-is-factoring (Todd Maiden)
