Factoring (also known as receivables factoring & debtor financing), is a form of financial transaction in which a company (known as a factor) buys a debt or invoice from another company. In factoring, accounts receivable are discounted in order to allow the buyer to make a profit upon the settlement of the debt. This allows the company that has sold its debts (receivables) access to "realised sales" after paying the discounted premium and thereby improving cash flows and reducing credit exposure on their buyers.

Factoring is a provision for short-term finance, rapid financing of receivables, incorporating risk prevention, follow-up and account management. Factoring provides an alternate means of financing, which helps reduce the overall credit risk of the client. It also reduces the requirements and efforts in receivables management (in terms of follow up, reminders etc)

Depending upon the requirments of individual clients, a company may use factoring
In Start-up/ rapid growth Phase: To Overcome the shortfall of cash flow or bank credit limits, financing receivables through a factor is advantageous.
In normal growth Phase: A company gets protection against credit risk in customer payments.
Most factoring transactions are structured in a manner that factoring facility is 'without recourse' in case of financial credit risk. This allows the sale to be treated as complete and therefore, factoring is sought after by many corporates as it helps in sales realisation and balance sheet improvement. Additionally, given that the factor is taking the 'buyer risk', most factoring structures are 'without recourse' to the client (which has factored its receivables).

There are two-three main components upon which factor's services are remunerated as:
The Factoring facility fees: This is for setting up the factoring facility.
The Financing rate: This is the rate at which the invoices are discounted
Factoring fees: This is the rate for extending factoring for specific buyer's. Generally speaking, this is fee for arranging limits on a specific buye'r.

Factoring & bill discounting are used to fulfil the requirements of short-term financial requirements of a company. Bill discounting is the advance against the bill and is a with-recourse facility therefore will require collateral, whereas factoring is generally 'without recourse' and doesn't require any collateral.