Factor: A Comprehensive Guide to Its Legal Definition and Uses

Q: How does factoring work?

After invoicing clients, a business sends the invoices to a factor, which provides an advance payment and collects the receivables.

Q: What are the benefits of factoring?

Factoring provides immediate cash flow, reduces the burden of collections, and can be a flexible financing option.

Q: Is factoring expensive?

Yes, factoring can be more expensive than traditional financing, with fees ranging from 2 to 10 percent of sales.

Definition & Meaning

The term "factor" refers to a person or entity that sells goods on behalf of another party, typically for a commission. In commercial transactions, a factor takes possession of goods and sells them under their own name, distinguishing them from brokers, who do not take possession. Additionally, a factor may provide financing by purchasing accounts receivable (A/R) from a business, allowing the business to receive immediate cash flow instead of waiting for customer payments.

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Legal Use & context

In legal practice, the term "factor" is commonly used in the context of commercial law and finance. It is relevant in transactions involving accounts receivable and financing arrangements. Factors enter into agreements that may require specific legal forms, which can often be managed using templates provided by services like US Legal Forms. Understanding the role of factors is essential for businesses seeking to improve cash flow and manage receivables effectively.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: A manufacturing company has $100,000 in outstanding invoices. To improve cash flow, they sell these receivables to a factor for $80,000, receiving immediate cash while the factor manages the collection.

Example 2: A small business uses a factor to handle its accounts receivable, allowing it to focus on growth rather than collections (hypothetical example).

State-by-state differences

Examples of state differences (not exhaustive):

State	Factoring Regulations
California	Requires specific disclosures in factoring agreements.
New York	Has specific laws governing the assignment of receivables.
Texas	Allows for both recourse and nonrecourse factoring agreements.

This is not a complete list. State laws vary, and users should consult local rules for specific guidance.

Comparison with related terms

Term	Definition
Factor	A person or entity that sells goods for a commission and may finance receivables.
Brokers	Intermediaries who facilitate sales without taking possession of goods.
Accounts Receivable Financing	A broader term that includes factoring and other financing methods based on receivables.

Common misunderstandings

What to do if this term applies to you

If you are considering using a factor for your business, evaluate your cash flow needs and the terms offered by different factoring companies. Compare fees and services to find the best fit for your situation. You can explore US Legal Forms for templates that can help you draft agreements and manage the factoring process. If your situation is complex, consider consulting a legal professional for tailored advice.

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Quick facts

Typical fees: 2 to 10 percent of sales.
Advance rate: Generally 80 to 85 percent of invoice value.
Recourse vs. nonrecourse options available.
Common in industries with slow payment cycles.

Key takeaways

Frequently asked questions

What is factoring?

Factoring is a financial transaction where a business sells its receivables to a third party for immediate cash.