Factor
Definition
A factor is an agent employed to sell goods or merchandise consigned or delivered to them by their principal in exchange for a fee, commonly known as factorage, commission, or discount. Factors may conduct transactions in their own name or the name of the principal.
Examples
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Textile Industry: A company may produce a large quantity of fabric and send it to a factor to sell on its behalf. The factor would manage the sales process and remit the proceeds back to the company minus a factorage fee.
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Agricultural Products: Farmers often use factors to sell their crops. The factor brokers deals with buyers, ensuring better market access and prices for the farmers’ produce.
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Import/Export Businesses: An exporter provides goods to a factor in a foreign country. The factor sells these goods locally, dealing with local customs and market requirements, and then sends the proceeds back to the exporter after subtracting their commission.
Frequently Asked Questions
Q1: What is the primary role of a factor? A1: The primary role of a factor is to facilitate the sale of goods or merchandise on behalf of the principal, managing transactions and market access, and handling related administrative and logistical tasks.
Q2: How is the factor compensated? A2: Factors are typically compensated through factorage, which can be in the form of a commission or discount on the sales proceeds.
Q3: Can a factor act in their own name? A3: Yes, a factor can buy and sell goods either in their own name or the principal’s name, depending on the agreement between the factor and the principal.
Q4: What types of businesses commonly use factors? A4: Common users of factors include manufacturers, farmers, and export/import businesses that need assistance in selling their products in various markets.
Q5: What is the difference between a factor and a broker? A5: While both facilitate transactions, a factor takes possession of the goods and is directly involved in the sales process. In contrast, a broker does not take possession but merely arranges sales transactions between buyers and sellers.
Related Terms
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Factoring: A financial transaction in which a business sells its accounts receivable to a third party (the factor) at a discount in exchange for immediate cash.
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Commission: A fee paid to an agent or factor for their services, usually calculated as a percentage of the total sale price.
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Agent: An individual or entity authorized to act on behalf of another (the principal) in business transactions.
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Principal: The individual or entity for whom the factor or agent acts.
Online References
Suggested Books for Further Studies
- “Factoring: A Realistic Approach” by M.C. Taylor: This book covers the practical aspects of factoring, including detailed procedures and case studies.
- “Commercial Law Applied: Learn to Play the Game” by Dave V. Cleary: This book offers insights into various commercial law practices, including the roles and responsibilities of factors.
- “Receivables Financing and the International Assignment of Receivables” by Katherine Bell: An in-depth look at factoring within the context of international business and trade.
Fundamentals of Factor: Business Law Basics Quiz
Thank you for exploring the crucial function of a factor in business law and testing your knowledge with these quiz questions. Keep enriching your understanding of commercial practices!
