Factoring is a financial transaction in which a firm sells its accounts receivable to a third party (the factor) for less than their book value, i.e. at a discount. Businesses resort to factoring in order to get money quickly, avoid the hassle of collecting debt, not to mention bad debt, and smooth cash flows.

In other words, factoring is virtually synonymous with borrowing money using accounts receivable as collateral, though such collateral is being sold at less than its worth to compensate buyers for all risks involved. In that sense, factoring is different from a bank loan since it involves the value of receivables where invoices are turned into cash, whilst in borrowing from banks, the emphasis is set on the value of a borrower’s total collateralized assets.