In a traditional factoring arrangement, a company actually sells its receivables to another company (a "factor") at a discount. The factor collects the receivables and performs any necessary credit or accounting services. When the receivables are collected, the factor may return some of the discount to the borrower. Whatever portion of the discount that the factor retains is the factor's revenue on the transaction. Factoring is normally done without recourse, which means that the factor bears the risk that the receivables may not be collected.
If the borrower rather than the factor bears the risk of non-payment, then the factoring arrangement is referred to as "full-recourse." Often times, factoring is done on a "non-notification" basis. Non-notification means that the borrower's customers are not notified that the receivables have become the property of the factor. The unique advantage of factoring is that the borrower's credit worthiness is not very important. Instead, the credit worthiness of the borrower's customers (from whom the receivables are due) is the primary basis of the factor's decision. So factoring is a great way for less credit worthy borrowers to obtain financing if their customers are low credit risks.
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