Many companies in need of working capital, often young, growing companies without access to traditional credit, find alternative financing by factoring their accounts receivable. Factoring those accounts involves the sale or assignment of the company’s receivables to a lending company, referred to as a “factor,” and, in exchange, the factor provides capital to the company, limited by the value of receivables sold or assigned to the factor.
Factoring can be expensive. In a typical factoring arrangement, the factor will advance 80 percent of the face value of the receivables and charge a fee equal to a percentage of the amount advanced for an initial 30-day period and an additional fee at a lower percentage for each 10- or 15-day period after that.
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