Healthcare providers selling their accounts receivables in the factoring. Factoring companies engaged in the business of purchasing accounts receivable are called factors. It works like this: You provide goods or services to your customers in the normal way. The term factoring refers to the outright purchase and sale of accounts receivable (A/R) invoices at a discount from a provider’s full billed charges. In return for the access to fast capital, a business will pay an invoice finance company a fee. This is done against invoices from their customers that are currently outstanding. It is an asset-based loan that enables businesses to borrow money. for income tax and VAT purposes.įrom a business management perspective, our view is that factoring should be regarded as a way of raising working capital at a certain cost and should therefore be regarded as debt, irrespective of the legal, accounting or tax status of the transaction. Invoice factoring means selling control of your accounts receivable, either in part or in full. Invoice financing, also known as receivable financing or invoice trading, is a form of a loan. The legal nature of the transaction may be entirely different from the accounting treatment of that transaction, which may also be different to the tax treatment, e.g. Factoring is a form of Receivables Purchase, in which sellers of goods and services sell their receivables (represented by outstanding invoices) at a. Whether or not the financier has recourse to the business if the debtors don’t pay also plays a role in determining how the transaction should be seen. However, these general statements may be overridden by accounting regulations or legislation applicable in a particular country. If the debtors are only used as security for finance, it is legally regarded as debt. A factoring company will pay you most of the invoiced amount immediately, then collect payment directly from your customers. If the debtors, or more specifically their obligations to make payment in terms of the invoices, are sold to the financier, it is legally considered to be a sale and purchase and not a loan or a debt. Invoice factoring is type of invoice finance where you 'sell' some or all of your company's outstanding invoices to a third party as a way of improving your cash flow and revenue stability. Factoring, receivables factoring or debtor financing, is when a company buys a debt or invoice from another company. This depends on the legal structure used to raise finance against a business’s debtors, not the terminology.
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