It’s when you use your receivable as collateral for a loan.

You show you’re owed $1 million, some aged, some less than 60 days, and the lender evaluates the credit worthiness of those who you money and how much of the aged receivables you’ll eventually get. And then they lend you money based on the evaluation.

Factoring is where a business assigns their A/R’s to a third party in return for immediate cash and the third party collects the receivables. It’s just another way to manage cashflow.

@zenvelo You’ve described assignment – using the receivable as collateral for a loan. Assignment is similar to, but different from, pledging, when the asset’s used as security.

In a factoring arrangement, accounts receivable are, in effect, sold to a third party. Title is transferred. Client/customer payments are made directly to the factor, who’s responsible for collecting the balances.