A form of insurance which covers losses from bad debts. The ordinary insurance company does not normally offer this service but leaves it to specialist companics. These buy up a list of debtors from a client business at an agreed discount which will cover the costs of collection, the risk assessed, interest on slow payers and a profit margin. The business employing the collecting service loses part of its trading profit. represented by debts due, but often gains considerably by obtaining immediate cash and thus improving its cash flow position. The whole operation is usually referred to as factoring and the operatives as factors. It is very similar to the service offered by hire purchase finance companies.
|Reference: The Penguin Business Dictionary, 3rd edt.|