Factoring is a form of asset-based lending that is provided by financial services companies and some banks to businesses. It is a common form of working capital finance for garment manufacturers and other businesses that sell goods to regional and national retailers in the U.S.
Factors purchase the outstanding accounts receivable (payments due from customers) of a business at a discount from face value. Customers typically are instructed to send invoice payments directly to the factor, rather than the business product supplier through a lock box system of payment processing. Better interest rates and fees are offered to businesses that sell to well-known retailers or other customers who pay their bills in a timely, predictable way.