A way of financing. In the case of factoring, company sells its accounts receivable to the financial institution, the factor. The factor institution considers the risk of receivable accounts and the age of accounts, paying the company reduced value of original receivable.
Factoring is a good way for company to free up its capital, focus it to current business activities and transfer the risk to the financing company.
Factoring is also referred to as “Accounts Receivable Financing.”