Accounts receivable & factoring example

Spiffy Cleaners is a dry-cleaning business that wants to buy new equipment.  Unable to get a loan on favorable terms, Spiffy Cleaners decides to sell its accounts receivable to a factor. 

On their face, the accounts receivable should generate $20,000 in the next four months.  However, the factor buys them for $15,000 after heavily negotiating with Spiffy Cleaners about the risk of non-payment from certain customers.

Now, Spiffy Cleaners can use cash to buy equipment, and any payments from customers whose accounts were sold will be forwarded to the factor.