In business finance, factoring is the process of selling unpaid invoices to a specialist for immediate cash.
A factoring company, often called a factor, advances most of an invoice’s value to the business and later collects payment from the customer. The factor keeps a fee or discount when the invoice is settled. This can provide working capital faster than waiting for customers who pay on 30-, 60-, or 90-day terms.
The arrangement may be recourse or non-recourse. With recourse factoring, the business can remain responsible if the customer does not pay. With non-recourse factoring, the factor generally assumes specified credit risk, although the contract may contain exceptions for disputes or fraud.
Factoring is not the same as a bank loan, although both can provide liquidity. It is also different from invoice discounting, in which a business typically retains collection control and may borrow against receivables without openly assigning them to a factor.