Factoring

Factoring is a term that refers to the sale of short-term (usually with a maturity of 14-90 days) collective receivables that are not secured (i.e. hedge funds are not used), resulting from the sale of goods and services before their due date.

It is an alternative form of refinancing based on the purchase of receivables. Specialized factoring companies perform the buyout of receivables (mainly banks or insurance companies, or companies associated with them with an ownership) usually without recourse to the supplier if the customer does not pay.

The advantage of factoring is that it reduces capital commitment in receivables, eliminates the risk of non-payment and interest rate risk, and reduces administrative costs associated with the registration of claims.

Factoring in practice: Factoring is used by contractors. It means for them increasing competitiveness by allowing payment for deferred delivery, while not having capital tied up in receivables.