You may have heard the term of Factoring, which is a financial transaction done by two parties. The first party is a business with accounts receivable or invoices that sells their accounts receivable and invoices to the second party, which is a Factoring Company. So, Accounts Receivable Financing is the financing done by a Factoring Company to a business with accounts receivable. In this case, the Factoring Company will buy Accounts Receivables at the discounted prices. The businesses with these accounts receivables are usually the businesses that do sales on the credit terms or installment plans such as banks, car loan providers, insurance companies, and more. So why does a business sell their accounts receivables? And why does a Factor Buy Accounts Receivables? What are the benefits for the two parties?
Especially, for the start-up, small businesses, the accounts receivables can be their real profits. If this condition continues without additional capital, their businesses will die fast. Selling their accounts receivables can be the best solution for such businesses, because they do not need to take any loan for additional capital. In the meanwhile, the Factoring Companies will buy the accounts receivables because there is the difference price between what they pay and what they receive from the customers.