Factoring
Factoring is selling trade receivables to a factor for immediate cash, at a discount and a fee; whether the receivable leaves the balance sheet depends on whether the sale is with or without recourse for bad debts.
See it move
Loading infographic...
A business factors €50,000 of receivables. The factor advances 85% immediately, €42,500, into the business's account. Once customers pay in full, the factor remits the remaining 15%, €7,500, minus its 2% fee of €1,000, leaving €6,500. In total the business receives €42,500 + €6,500 = €49,000, the €50,000 face value less the €1,000 fee.
Where it fits
SubjectFinancial AccountingAdvancedTopicWorking Capital & Trade AccountsAdvanced
The formula
LaTeX
Variables
- Immediate advance (€)
- Receivables factored (face value) (€)
- Advance rate (proportion, e.g. 0.85 for 85%)
Gives the cash a business receives upfront when it factors a batch of receivables, before the factor's fee and final remittance.