Factoring (finance) facts for kids

Factoring is a way for businesses to get money right away instead of waiting for payments they are owed. Imagine a company that has finished a big part of a building project. They know they will get paid for this work in a few weeks or months. But they need money now to buy more materials or pay their workers.

This is where factoring comes in! The company can sell the right to receive that future payment to another company, called a "factor." In return, the factor gives them most of the money right away. The factor then collects the full payment later from the original customer. For this service, the factor takes a small fee, which is a percentage of the total payment.

Factoring is very helpful for businesses, especially in industries like construction, where payments often come in stages. It helps companies avoid delays and keep their projects moving smoothly because they have the cash they need when they need it.

What is Factoring?

Factoring is when a business sells its future payments (like invoices or money it's owed) to a third party, called a "factor." This factor then gives the business immediate cash. It's like getting an advance on money you know you will receive later.

How Does Factoring Work?

Here's a simple way to think about how factoring works:

• A company completes work or sells goods to a customer.
• The customer owes the company money, but they will pay later (for example, in 30 or 60 days).
• The company needs money now to pay for things like salaries or new supplies.
• The company sells the invoice (the bill for the money owed) to a factoring company.
• The factoring company gives the business most of the money right away (for example, 80-90% of the invoice amount).
• When the customer finally pays the bill, they pay the factoring company directly.
• The factoring company then gives the remaining money to the original business, minus their small fee.

Why Do Companies Use Factoring?

Companies use factoring for several reasons:

• Quick Cash: It provides fast access to money, which is great for businesses that need cash flow to operate daily.
• Growth: It helps companies grow by allowing them to take on more projects or orders, even if they have to wait for customer payments.
• No Debt: Unlike a loan, factoring isn't a debt. The company is selling an asset (its future payment), not borrowing money.
• Better Finances: It helps businesses manage their money better and avoid financial problems when waiting for payments.

Factoring and Banks

Traditionally, factoring was done by specialized factoring companies. However, some banks are now also offering factoring services. They aim to provide similar help to businesses that need quick access to their future earnings. This gives companies more choices when they are looking for financial support.

See also

In Spanish: Factoraje para niños