Factoring Law and Legal Definition

Factoring is a financial transaction in which a firm sells its accounts receivable invoices to a third party called a factoring firm at a discount, so that it receives immediate money to continue its business. The factoring firm pays a percentage of the invoices immediately. Firms often factor receivables to improve their cash flow.

Factoring is different from bank loans. In factoring, the emphasis is on the receivables of the firm selling its receivables. A factoring transaction involves three parties.