Factoring . . .

is a form of receivables financing. The factor (or lender) pays the company a discounted portion of the company’s receivables and then collects those receivables directly from customers as they become due.

Factoring differs in popularity by industry. It is perhaps most widely used in the garment industry, in which orders are shipped well before the season when they are to be sold, but vendors cannot (or do not) pay for the merchandise until it is sold. A factor will buy the invoices from the manufacturer at a discount. The manufacturer receives the factor’s money and shows the invoice as paid. The factor collects the full face value of the invoice and accepts the risk of doubtful accounts. See: Collateral, Inventory Financing, Receivables Financing.