Factoring is a monetary transaction and a type of debtor finance in which accounts receivable or invoices are sold by a business at a discount to a third party known as the factor. Present and immediate cash needs are met by a business by factoring its receivable assets. There is a type of factoring management known as forfaiting which is used by exporters in international trade finance. The exporters wish to sell their receivables to a forfaiter. Factoring is usually referred to as invoice factoring, account receivable factoring and sometimes account receivable financing. Accounts receivable finance usually describes a form of asset based lending against accounts receivable.Factoring and invoice discounting are not same. The sale of receivables is factoring whereas a borrowing which involves the use of accounts receivable assets as collateral for the loan is invoice discounting. There is another type of factoring known as reverse factoring or supply chain financing. Reverse factoring is a financing solution which is initiated by the ordering party in order to help his suppliers to finance their receivables more easily and at a lower interest rate than what they would normally be offered. The best factoring companies usually have three parties directly involved: the factor that purchases the receivables, the one who sells the receivables, and the debtor who has a financial liability that requires him or her to make a payment to make a payment to the owner of the invoice.

Some firms use factoring as method to obtain cash. The accounts are factored by certain companies when the available cash balance held by the company is insufficient to meet current obligations and accommodate its other cash needs such as new orders or contracts. The best factoring companies reduce the size of cash balances so that more money is available for investment in the firm’s growth.