In fact, factoring is an excellent solution for companies that don't want to wait for their accounts receivable to come to term. Today, nearly 80% of world trade is conducted through open account transactions, meaning that many accounts receivable are issued daily, often putting pressure on cash flows. In those cases, factoring becomes a truly appealing solution that can act as a source of leverage for companies.
Factoring is particularly helpful for seasonal merchants or those whose sales are growing, as they may rely heavily on their credit line or may have just signed a new major contract. As liquid assets are immediately made available, it is easier to plan cash flow and the line of credit can be reserved for other needs. Businesses can therefore grow more quickly and increase their profitability.
The concept behind factoring is straightforward: after delivering a product or service, a company transfers ownership for its receivable debt to a factor--Desjardins, for example. In return, the factor pays an amount equal to the purchase price minus factoring fees. The business immediately receives a large percentage (generally 90%) of the factored amount. The remaining balance is paid when the account comes to term.
Factoring allows a business to collect its accounts receivable shortly after a good or service is delivered, but before the invoice due date. The company who purchased the debt is responsible for collecting the amount from the business' client. In short, factoring is a legal transaction through which a business transfers ownership of its debts to another company (i.e., the factor) in return for immediate access to liquid assets, minus factoring fees.
Factoring is not very expensive, as it is limited to fees for management of receivables. Factoring also allows businesses to focus effort and assets on more profitable activities; they can pay suppliers more quickly and benefit from advantageous discounts.