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The Factor

Don’t worry this is not a column about Bill O’Reilly, the voluble Fox News personality. No, what I’m talking about is the bread-and-butter business of CIT Group, the mid-market lender now limping along on life support.

The Wall Street Journal today wrote one of the first decent articles discussing CIT’s importance in the world of factoring–an ancient form of business financing that CIT long dominated in the US.

In short, a factor is a lender that provides a company with upfront cash for the contractual right to collect on its account receivables. The company sells this contractual right at a discount to the full value of the receivables that it could in theory collect at a later date.

The factor is responsible for collecting on those receivables and gets to pocket the difference between what it paid for that right and the amount it actually collects. It’s a low-margin business, but one that provides a valuable means of financing for companies with inconsistent cash flows.

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