What is factoring?

Factoring are many names, including discounting invoices, factoring of receivables and financing of debtors. To put it simply, factoring is a practice where one company buys a debt or an invoice from another company. It applies to the acquisition of receivables that are discounted to allow the buyer to make a profit in the collection of money owed. Factoring transmits ownership of those accounts of another party that then works vigorously on the collection of debt.

While factoring can allow the responsible party to be alleviated by a debt for a lower amount, it is generally designed to be more convenient for a factor or new owner and seller of the account than for the debtor. The seller receives working capital while the buyer is able to make a profit by purchasing an account for much less than what is worth it and then collects on it. Factoring allows the buyer to buy such accounts for about 25% less than what they actually have.

The factor takes full responsibility for the debt collection. The factor is required to pay for additional fees, usually a small percentage as soon as the effort to collect is successful. The new account owner can offer a small discount on an outstanding debt to a responsible person or entity. Sometimes other arrangements are made in which the debt is considered to be paid in full, if under certain conditions a lump -sum payment is carried out. Unfortunately, in some cases, factoring can cause a consumer or indebted company a large financial stress, for example in the case of debt consolidation.

For example, if a person connects to the debt consolidation program and one creditor is involved in factoring, then the entity who buys an account does not have to be bound by the program with the original creditor. The factor may require a large amount to consider the account account, and may have the interest rate and the monthly payment amount. This form of factoring may in some cases prove to be a profitYou, but with others it may fail. The debtor may have no choice but to submit bankruptcy, because he simply cannot afford inflated interest rates and payment amounts. In most cases, factoring is a profitable enterprise, but it is good to review each account individually than to decide how to proceed.