SME short notes on Factoring

Factoring is a financial transaction in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. Forfeiting is a factoring arrangement used in international trade finance by exporters who wish to sell their receivables to a forfeiter.
 

Factoring is not the same as invoice discounting (which is called an "Assignment of Accounts Receivable" in American Accounting - as propagated by FASB within GAAP).

Factoring is the sale of receivables, whereas invoice discounting ("Assignment of Accounts Receivable" in American Accounting) is a borrowing that involves the use of the accounts receivable assets as collateral for the Loan. However, in some other markets, such as the UK, invoice discounting is considered to be a form of factoring, involving the "assignment of receivables", that is included in official factoring statistics. It is therefore also not considered to be borrowing in the UK. In the UK the arrangement is usually confidential in that the debtor is not notified of the assignment of the receivable and the seller of the receivable collects the debt on behalf of the factor. In the UK, the main difference between factoring and invoice discounting is confidentiality.