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.