Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. Factoring is commonly referred to as accounts-receivable financing, accounts receivable factoring, and sometimes invoice factoring.
Accounts-receivable financing is a type of asset-financing arrangement in which a company uses its receivables — outstanding invoices or money owed by customers — to receive financing. The company receives an amount that is equal to a reduced value of the receivables pledged. The receivables’ age largely impacts the amount of financing the company receives. Accounts receivables financing companies typically advance companies 70 to 90 percent of the value of their outstanding invoices. The factoring company collects the debts and pays the original company any remaining amount beyond the financing amount minus a factoring fee.
This type of asset-based financing allows companies to get instant access to working capital without jumping through the hoops or dealing with the long waits associated with getting a business loan (bank loans). While bank loans may be secured by different kinds of collateral, including plants and equipment, real estate, and/or the personal assets of the business owner, accounts-receivable financing is backed strictly by a pledge of the business’s assets associated with the accounts receivable to the finance company.
This type of financing helps companies free up capital that is stuck in unpaid debts. When a business leverages its accounts receivables to boost its cash flow, it also doesn’t have to worry about repayment schedules. Instead of focusing on trying to collect bills, it can focus on other core aspects of its business.
While this type of financing is commonly used in many countries, in Mongolia it is not quite popular. Although legal definition, grounds and regulations are provided for in relevant laws, not many financing companies provide this type of financing, nor the demand for it is so big either. But with today’s rapid development and progress in international business and trade it is an open business option to consider for companies.