What is factoring?

Definition of factoring

Factoring occurs when a company purchases a debt from another company. The purchasing company is known as the factor and will usually purchase the debt at a discounted rate.

Factoring allows the selling company to secure immediate payment of the debt, typically at around 80%. The factor then pursues payment of 100% of the debt from trade debtors in order to make a profit when the debt is settled.

In addition to providing immediate payment, factoring may also provide the selling company with a degree of security against bad debts. Other benefits can include:

  • sales ledger administration
  • debt collection
  • legal advice
  • credit information on customers

The factoring process can be administered in several different ways. You can learn more about different types of factoring on HMRC’s website.

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