Explain the role a factor plays in providing short-term financing to a firm.

Question

What will be an ideal response?

Answer 1

Answers will vary. The money that customers owe a firm when they buy on credit shows up in accounts receivable on the company's balance sheet. A factor buys the accounts receivables of other firms. The factor makes a profit by purchasing the receivables at a discount and collecting the full amount from the firm's customers. Although firms that use factors don't receive the full amount their customers owe, factoring offers some definite advantages. Instead of having to wait for customers to pay, the firm gets its money almost immediately. Also, since the factor is responsible for collection efforts, the firm using the factor may be able to save money by eliminating its own collection department. Finally, the factor typically assumes the risk for bad debts on any receivables it buys.