![]() Consequently, borrowers typically review other types of financing arrangements before they turn to factoring as an option. ![]() The fees associated with factoring are quite high, making this one of the more expensive financing alternatives available. This approach is least visible to customers. Borrower Has ControlĪccounts receivable are essentially used as collateral on a cash advance from a lender, but the borrower maintains control over the receivables and collects from customers. This approach reduces the risk of non-payment for the lender. ![]() The lender monitors all receivables due from the customers of the borrower, and has payments sent to the lender's designated location. The lender advances a certain percentage of the receivable balances to the borrower, and commits to collect the receivables. Thus, there is an inherent tension between the parties regarding how a factoring arrangement is to be set up. However, giving the borrower control over receivables makes it less likely that the lender can collect on the receivables in the event of a default by the borrower. From the perspective of the borrower, there is a strong incentive to keep customers from knowing about any factoring arrangements, since factoring gives the appearance of the business having shaky finances. There are several variations on the factoring concept, which are noted below. A factoring arrangement can be extended by constantly rolling over a new set of accounts receivable if so, a borrower can may have a base level of debt that is always present, as long as it can sustain an equivalent amount of receivables. This type of borrowing is intended to be short-term, so that borrowed funds are repaid as soon as the associated accounts receivable are paid by customers. Factors are usually willing to advance funds quite rapidly under this type of arrangement. The borrower is willing to accept a factoring arrangement when it needs cash sooner than the payment terms under which its customers are obligated to pay. Factoring is the use of a borrowing entity's accounts receivable as the basis for a financing arrangement with a lender.
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