“Factoring is the buying of accounts receivable at a discount. The price is discounted because the factor assumes the risk of collection on the accounts receivable.” Black’s Law Dictionary, Eighth Edition, 2004.
Three parties are involved in a typical factoring arrangement; the owner of the account receivable, the debtor on the account receivable and the buyer of the account receivable ( “the factor”). The receivable is associated with the debtor’s liability to pay money owed to the owner of the account receivable for work performed or goods sold. The owner sells one its invoice at a discount to the factor in order to obtain cash. The sale of the receivable transfers ownership of the receivable to the factor, and the factor obtains all of the rights associated with the receivable, including the right to receive the payments owed by the debtor for the invoice amount.