Through factoring, a company sells its accounts receivables to another company that is contracted to collect them. The accounts receivables are invoices that represent sales or services provided to suppliers or customers that can be both inside and outside the country.

The factoring company is given all the information on the customers and the amounts that they owe. Your company would then receive a percentage of the invoices to be collected even before they are paid by the customer. The collection is exclusive to the factoring company.

In return, the factor advances to the seller the amount of receivables sold through the payment of commissions. If unpaid, the risk is insured by the factor which can not be turned against the seller.

These types of services are provided around the world by banks or Factoring companies.

The supplier must obtain the approval of each factor for its customers generally with a maximum per customer.

The factor provides three services: Financing of the client (in advance of delivery of a check); Management of debt recovery (this is the factor which is responsible to recover the amount of invoices); and Guarantee of payment of the latter (if unpaid, the risk is borne by the factor).

Factoring is become very popular amongst small entrepreneurs, because of this reason some of them have decided to set restrictions of the amounts paid when customers do not pay.

Some of the reasons why people use Factoring are:

Firstly the fact that Factoring relieves the company from the stress of having to deal with the collection process. They do so by using their expertise and appropriate technology that ensures effective payment by the customers. The most important one is that through factoring the company is guaranteed to receive an amount even if the customer fails to pay.

The advantages of factoring are:

Providing the total outsourcing of the client, the factor allows the company to make significant economies of scale: one on staff costs, and on the cost of insurance and the costs of bank financing.

Factoring allows companies to improve the planning of their income given that they would receive the amount agreed on the accounts receivable regardless of whether the customer pays or not.