Factoring as a financial tool has been around for a long time. In basic terms, it is a transfer of risk. Although many financial experts will use the term factoring synonymously with accounts receivable financing, factoring is different in that it transfers ownership of the accounts receivable.

“Factor” refers to the third party that is purchasing the risk—in these cases, the accounts receivable. Factoring allows a business to ensure consistent cash flow when needed and allows them to keep less cash on hand at any given time.
Factoring is a corporate finance technique that enables a company to either:

• Transfer the credit risk of its accounts receivable to a third party.
• Leverage its accounts receivable to accelerate its working capital through the sale of its accounts receivable to a third party.

With factoring, you can offer your clients credit terms rather than cash up front, without the hit to your cash flow. Even though the client pays with credit, through factoring you have cash flow right away because the factor will give you a cash advance on those accounts receivable.