What is Factoring?
In finance, factoring is defined as a mechanism where businesses sell the receivables of their accounts to a third party and in exchange receive an immediate advance on the amount. The third party in factoring is known as a factor. The business receives an advance of 80% of its total invoice amount. In the process of factoring the responsibility of collecting the payments from the customers is transferred to the third party. The seller does not have any responsibility for collecting the dues or payments from customers. The service fees charged by the factors range from 2% to 6%. This service fee depends upon various factors, such as size of deal, market trends, type of factoring, quality of portfolio, competitors in the market, etc.
Difference between Forfaiting and Factoring
Forfaiting and Factoring are often used synonymously by a layman, but there are differences between the two. Forfaiting is an international finance mechanism where an exporter sells its accounts receivables to a third party, whereas in factoring a business sells the receivables of accounts to a third party and in exchange receives an immediate advance on the amount.