Factoring

Formal

This is a process where a Bank effectively buys the debts of a business and lends monies to the business using the debts as security. This process provides businesses with cash ‘ahead’ of the time it would normally have received monies from its customers.

Real-world Example

A business sells its $500,000 of outstanding invoices to a factoring company for $475,000 upfront cash, rather than waiting 60 days for customers to pay - trading a discount for immediate cash flow.