Factoring of accounts receivable is a financial transaction in which a business **sells** its accounts receivable (invoices) to a third party, known as a factor, at a discount. The factor then assumes responsibility for collecting the payments from the customers who owe the invoices. This allows the business to get immediate cash for the invoices, rather than having to wait for customers to pay them over time. Factors charge a fee for their services, usually based on a percentage of the total amount of invoices sold. Factors often charge additional fees if the account receivable is collected slower than the required terms. Factoring can be beneficial to businesses that need cash flow quickly or have difficulty obtaining traditional bank financing. #### Banking Considerations Factoring can be expensive. Many businesses use it as an alternative to a [[Lines of Credit | line of credit]]. However, [[Lines of Credit | lines of credit]] often have more stringent approval requirements and not available to all businesses. It can, at times, be difficult for business to migrate from factoring to lines of credit, as the higher cost of factoring can limit the business's ability to generate strong core equity and liquidity. Some borrowers may include factored accounts receivable on their balance sheets. While this is not technically correct, as the accounts receivable have been sold, it is a relatively common error to encounter as a banker. Additionally, the amount factored by a borrower should be disclosed as a [[Contingent Liability | contingent liability]] and not a direct liability of the borrower. This is another common error encountered on financial statements. As such, it is recommended lenders identify any factoring activities by borrowers and make analytical adjustments to financial statements if they do not accurately reflect the borrower's factoring.