You’re probably wondering what are factored receivables. First things first, they have nothing to do with factories.
In fact, to factor your company’s receivables against your customers’ means that effectively you’ve given part or all of your responsibilities relating to collecting the receivables over to a financing company (i.e. a bank). This would also mean that you’ve transferred the risks of non-collection as well for a defined period at least.
Let me explain. There can be two types of factoring an entity can have – they’re called recourse and nonrecourse. Making use of invoice factoring means that you can opt for one of the possibilities and it’s important to understand which one you’ve went for both in terms of your financial reporting and understanding your cash flows.
The sole biggest reason companies use factoring is to manage their cash flows in a manner most suited for them and to still maintain favorable payment terms for the customers. For an example, say you want your money from sales in a week for instance, but your customers can pay you in two weeks. This leaves you with a gap where you could use the money to keep your business running and invest whereas with factoring your receivables you’d get the money from the financing company on terms better for your needs.
So there’s the reason you might consider factoring your receivables.