A type of factoring in which the seller of accounts receivable (debt) receives funds from the buyer (factor) prior to the average maturity date. These payments are determined based on the invoice amount (of the receivables) adjusted for discounts, allowances and returns, whatever the case is. In equation form, payment is calculated as follows:
Payment = invoice amount – cash discounts – allowance for claims – returns
The factor receives interest payments based on daily balances and a premium over a base rate (by 200-300 basis points, or so). It discounts the seller’s invoices at that rate as pre-agreed by and between the two sides. The underlying debt (receivables) serve as securities (collateral) for the transaction.
