Accounts Receivable Factoring
The practice of selling receivables to a third party at a discount to obtain immediate cash, transferring both the asset and collection responsibility.
Accounts Receivable Factoring
The practice of selling accounts receivable to a third party (factor) at a discount to obtain immediate cash rather than waiting for customers to pay.
For example, a manufacturing company facing cash flow challenges might sell $100,000 of receivables to a factoring company for $95,000, sacrificing $5,000 to improve immediate liquidity and transfer collection risk.
Factoring differs from a loan because it involves selling an asset rather than creating a liability. While it provides immediate cash and eliminates collection concerns, the discount rate can make it a relatively expensive form of financing compared to traditional loans for companies with strong credit.