What does the term' factoring of receivables' refer to?

The term "factoring of receivables" specifically refers to the sale of receivables as a means of financing. This process involves a business selling its outstanding invoices or accounts receivable to a third party, known as a factor, at a discount. The factor then assumes the responsibility for collecting the payments from the customers.

This practice allows businesses to obtain immediate cash flow, rather than waiting the typical 30 to 90 days for customers to pay their invoices. By selling the receivables, a company can access working capital more quickly, which can be vital for meeting operational expenses or investing in growth opportunities. Factoring can also help reduce the risk associated with unpaid invoices since the factor takes on the credit risk involved.

While using receivables as collateral, transferring them without responsibilities, or employing methods of collecting debt are related concepts in finance and credit management, they do not encapsulate the full scope of what factoring entails. Factoring is specifically about selling the receivables for cash, distinguishing it from other financial arrangements.