Factoring

Under a factoring arrangement, a finance company agrees to take over a company’s accounts receivable collections and keep the money from those collections in exchange for an immediate cash payment to the company.  This process typically involves having customers mail their payments to a lockbox that appears to be operated by the company, but which is actually controlled by the finance company.  Under a true factoring arrangement, the finance company takes over the risk of loss on any bad debts, though it will have the right to pick which types of receivables it will accept in order to reduce its risk of loss.  A finance company is more interested in this type of deal when the size of each receivable is fairly large, since this reduces its per-transaction cost of collection.  If each receivable is quite small, the finance company may still be interested in a factoring arrangement, but it will charge the company extra for its increased processing work.