Money factoring, also known as accounts receivable financing (in Europe), is a financial transaction where a business decides to sell its accounts receivable (also known as invoices) at a discount. Factoring is a different entity from a bank loan in three ways. The first way is that the emphasis is not on the firmТs credit worthiness, but rather on the value of the firmТs receivables. Second, factoring is not considered a loan. Factoring is the purchase of an asset. Lastly, a bank loan is an exchange between two separate parties while factoring is a transaction between three different parties.

The three parties involved in the transaction are the seller, debtor, and the factor. The seller is the part that is owed a certain amount of money, usually for works performed or good sold. The second party, the debtor, is the one who owes money to the first party, the seller. To correct the situation and create a balance, the debtor will sell on or more of its invoices at a discount to the third part, the factor. The factor is a specialized financial organization. It buys the invoices and the debtor obtains cash to pay the factor the full value of the invoice.

At the heart of money factoring is the accounts receivable department of a business. If a business invoices a customer, there is normally a waiting period between the receipt of the invoice by the customer and the receipt of payment by business. Money factoring allows the business to be paid nearly immediately while a third party handles the accounts receivable portion of the bill.

The reason that this works is because for a company to sell invoices at a discount, it is more profitable for them to use funds that support their sales growth. Sellers will make more money from investing in their own growth than from supporting a customerТs business by extending credit to them.