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Factoring Process

In business law, “factoring” has a different meaning than its mathematical context. Factoring in business law refers to a financial transaction where a business sells its accounts receivable (invoices) to a third party, known as a factor. The factor then assumes the responsibility of collecting the payments from the business’s customers.

Here is how the factoring process typically works in the context of business law:

  • Agreement between Business and Factor
    – A business that needs immediate cash may choose to factor in its accounts receivable.
    – The business and the factor enter into a factoring agreement outlining the terms and conditions of the transaction.
  • Submission of Invoices
    – The business provides the factor with a list of its outstanding invoices that it wishes to factor.
  • Due Diligence by Factor
    – The factor conducts due diligence to assess the business’s customers’ creditworthiness and the invoices’ validity.
  • Advance Payment
    – Upon approval, the factor provides an advance payment to the business, typically covering a percentage (e.g., 70-90%) of the total value of the invoices.
  • Collection of Receivables
    – The factor takes over collecting payments from the business’s customers. The customers usually need to be made aware of the factoring arrangement.
  • Reserve Amount
    – Once the factor collects the full payment from the customers, it deducts a fee (factoring fee) and any other applicable charges.
    – The remaining amount, known as the reserve, is then paid to the business.
  • Completion of Transaction
    – The factoring process is complete when the factor has collected all payments for the factored invoices.

Benefits of Factoring in Business Law

Improved Cash Flow: Factoring provides immediate cash to the business, helping to improve liquidity.

Outsourced Credit Management: The factor handles the collection of receivables, reducing the burden on the business’s internal resources.

Risk Mitigation: The factor assumes the risk of customer non-payment, protecting the business.

Focus on Core Activities: By outsourcing receivables management, the business can focus more on its core operations.


  • Factoring can be more expensive than traditional financing methods, and businesses must consider the cost implications carefully.
  • The factor’s interaction with the business’s customers may impact the customer-business relationship.
  • In summary, the factoring process in business law involves a financial transaction where a business sells its accounts receivable to a third party for immediate cash, with the third party (factor) assuming the responsibility of collecting payments from the business’s customers.

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