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.
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.
