Factoring is often used synonymously with accounts receivable funding. Factoring is a form of commercial funding whereby a business sells its accounts receivable (in the form of invoices) at a discount. Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30 to 90 day terms. Businesses benefit from the acceleration of cash flow.
Factoring is considered off balance sheet funding in that it is not a form of debt or a form of equity. This fact makes factoring more attainable than traditional bank and equity funding.
There are usually three parties involved when an invoice is factored: