Factoring is a financial transaction in which a business sells its accounts receivable (unpaid invoices) to a third party, known as a factor, at a discount to receive immediate cash. The factor takes on the responsibility of collecting the payment from the customers. Factoring helps businesses improve their cash flow.

Amit Manufacturing sold products worth ₹1 crore to large industrial clients on 90-day payment terms. To maintain steady cash flow and avoid delays in covering operational costs, it decided to use factoring with ABC Factors.

ABC Factors advanced 80% of the invoice value (₹80 lakh) to Amit Manufacturing providing the company with working capital. ABC Factors took on the responsibility of collecting payments from the company’s clients on the due date. After the clients paid the full ₹1 crore to ABC Factors, the company deducted fees and interest (₹5 lakh) and released the remaining ₹15 lakh to Amit Manufacturing.

Factoring became well-established in the 19th century in Europe and the United States, particularly in industries like textiles.