Factor Companies (Lending Institutions)

The commercial finance company discussed above purchases receivables at a discount on a condition that if they are unpaid the seller of the goods will be responsible and returns the amount received against the sale of receivables. However, the factor company offers a greater facility to business firms.

Factor company purchases accounts receivables from them without the above condition. If the purchased accounts receivable are unpaid by the customer the factor company will suffer the loss. Hence, it assumes a fairly greater risk, and, therefore, charges comparably a higher discount. The customer who has bought merchandise on credit from the business firm is required to pay the sum directly to the factor company if his part of the bill has been sold to the factor.

Factors also lend money against the security of fixed and current assets as machinery, equipment, and inventory. They cater to the needs of only small business firms. Hence, large companies contact commercial banks for the financial needs.