In simple terms, factoring is the discount of account receivables. It enables the reduction of costs associated with bad credit, credit evaluation and bookkeeping, while eliminating cash flow imbalances due to seasonal fluctuations.

Factoring is also functional for clients looking to widen the geographic reach of their services into new markets.

The service initiates when a factoring agency (the factor) buys invoices from companies (the client) in exchange for immediate cash, and then holds the invoices for collection on the due date. As soon as a client completes a service or delivers the merchandise to the debtor, the invoice is forwarded to the factor for funding.

The factor will then provide an advance payment, ranging between 70 to 80 percent of the face value of the invoice, via wire transfer to the client's bank account. Once full payment is received from the debtor, the factor returns the invoice balance minus the factoring fees.