When Mel's Mattress Company struggles financially, Mel decides to sell his accounts receivable to a finance company, known as a factor, which pays him $60,000 for receivables with a total face value of $100,000. In this instance, how does the factor earn a profit?

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In some instances, businesses actually sell their accounts receivable to a finance company known as a factor, which gives the selling organizations cash and assumes responsibility for collecting the accounts. For example, a factor might pay $60,000 for receivables with a total face value of $100,000 (60 percent of the total). The factor profits if it can collect more than what it paid for the accounts. Because the selling organization's customers send their payments to a lockbox, they may have no idea that a factor has bought their receivables.

When Mel's Mattress Company Struggles Financially, Mel Decides to Sell