Factoring Loans: Understanding the 3 Parties Involved

Factoring has become a popular alternative to traditional business loans. Businesses of all sizes can receive funding without having to jump through the hoops associated with a traditional business loan.

A factoring loan allows you to sell unpaid invoices from your business to a third-party. Known as a “factor,” this third party will buy them at a discounted price, so you can focus on growing your company instead of collecting payments from clients or customers. There are many different types of factoring loans, but they all involve three parties.

Understanding the Three Parties Involved in Factoring Loans

The Factor

The factor is the entity that buys the invoices. Factors are not necessarily lenders, as some people might believe. Instead of lending money, factors purchase unpaid invoices from businesses at a discounted rate.

Factors earn money by collecting on these unpaid invoices. They buy the invoice for less than its “face value” and then attempt to collect the full amount.

The Seller

The invoice seller is the business that sells the invoices. Businesses that allow clients or customers to pay for products or services after delivery might choose to sell their invoices to a factor. This can be a good option for businesses that need capital but do not want to take on debt. The factor buys all or part of the unpaid invoices at a discounted price, creating a mutually beneficial partnership.

The Debtor

Debtors are the individuals or businesses that owe money to the seller. Customers or clients who purchase products or services are considered debtors. They receive a bill for the amount they owe after making a purchase. Initially, the debtors owe money to the company from which they bought the product or service. If the business sells these invoices to a factor, the debtors then become liable to the factor for payment.

Factoring loans involve three key parties: the factor, the seller, and the debtor. Factors purchase unpaid invoices at a discount, sellers are the businesses that sell these invoices, and debtors are the customers or clients who owe payments on these invoices.

This post was written by a professional at Blue Tree Financing. Blue Tree Financing is a dynamic financial institution with a steadfast commitment to empowering businesses. With a diverse range of offerings including capital injections, term loans, lines of credit, Merchant cash advance California, and invoice factoring, we stand ready to provide the financial solutions your company needs. When traditional banks turn you away, Blue Tree Financing steps in with a resounding “yes.” Our mission is to fuel growth, unlock potential, and drive success for businesses of all sizes. Join us on the path to prosperity.