We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What is Asset-Based Factoring?

Jim B.
Updated Feb 07, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Asset-based factoring occurs when a business sells off its assets to a factoring company in return for immediate payment. In most cases, the assets in question are invoices for payment from other companies that have received goods from the business without making immediate payment. The factoring company will advance a large percentage of the amount on the invoice to the business and then pay out the rest, minus a small discount fee, once it has received full payment from the debtor. By using asset-based factoring, businesses can assure steady cash flow without having to endure the credit checks that go along with applying for a business loan.

For a business, it is crucial that it finds ways to generate cash to sustain day-to-day operations. This cash can be difficult to come by, especially if it has established credit relationships with the other companies with which it does business. One way for a business to avoid the cash-flow problems associated with lengthy time spans between the delivery of goods and payment by debtors is asset-based factoring, which involves a third-party factoring company that advances cash and collects payments.

As an example of how asset-based factoring works, imagine that company A sells a product to company B for $2,000 US Dollars (USD), and company B plans to pay based on a credit arrangement with company A. Company A then contacts a factoring company, who agrees to buy the invoice and pay company A 80 percent of the amount in advance. The rest will be held in reserve by the factoring company until it can collect payment from company B. Once payment is received, the factoring company will pay the remaining amount to company A, minus a discount fee of 5 percent.

This means that company A will receive immediate payment of $1,600 USD from the factoring company. Once company B pays off the factoring company, company A will receive $300 USD more, which is the reserve amount minus the 5-percent discount fee. The factoring agency receives the discount fee, which comes to $100 USD, for its services.

How much a factoring company will advance in an asset-based factoring agreement and what the fees it charges will be are dependent on several factors. The factoring company will likely check out the credit-worthiness of the company's debtors and the volume of business the company does before establishing fees. In addition, the nature of the agreement may determine fee and advance rates. Specifically, if the business is not held responsible by the agreement for credit defaults by its debtors, the fees charged by the factoring company will be relatively high.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.