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In math, see Factorization.

In business and finance, factoring is the sale of accounts receivable. It is an alternative to lending with ancient origins. Many hybrid forms of factoring exist, but in its most basic form it involves three parties: Seller, Buyer, and Account Debtor.

The Seller is the concern that has produced goods or delivered services to their customer (the Account Debtor).

The Buyer (the factor or factoring company) buys rights to collect the Seller's accounts receivable, which are due from the Account Debtor at some point in the future, and receives a discount fee. In return for ceding collection rights, the Seller receives a discounted payment at the time of factoring and can use those funds for operations, growth, etc.

In factoring, the most important risk assessment is in determining the creditworthiness of the Account Debtor, not the Seller. Thus, factoring can be offered to companies without strong credit or companies that do not meet traditional bank lending requirements. It is also useful for seasonal businesses, international transactions, and any situation where non-debt financing is preferred.

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