5.
Explanation
Factoring is a financial practice where a business sells its outstanding accounts receivable to a third-party company known as a “factor.” This enables the business to receive immediate cash for its unpaid invoices, rather than waiting for customers to pay. The factor typically pays the business a discounted
amount, usually around 80-95% of the invoice value. The factor then assumes responsibility for collecting the full invoice amount from the business’s customers. Factoring serves as a working capital solution, providing companies with much-needed cash flow to cover operating expenses, invest in
growth, or seize business opportunities. It can also reduce the burden of managing accounts receivable and the associated credit risk. Businesses should carefully consider the costs and terms associated with factoring, as well as the impact it may have on customer relationships, before entering into such
agreements.