Factoring is the process of purchasing commercial accounts receivable (invoices) from a business at a discount.

This is the sale of accounts receivable invoices to a third party who then assumes the obligation of collecting the invoice. Factors can move quickly to get funds to a business but are usually the most expensive way to finance accounts receivable. Most factors initially pay 70% to 90% of the invoice amount followed by an additional payment when they collect the invoice. Ultimately, factors discount the invoice from 2% to 5% or more. Factors advance funds under one of two conditions: where the factor assumes all the liability for the invoice (non-recourse) or where the factor can come back to the business should the invoice become uncollectable and require reimbursement (recourse).