What if a company wants to collect on its receivables sooner?
Many companies are truly non-cash: all their revenue is tied to receivables. That setup works well if the company does not run into a problem with cash flow. Cash flow refers to how a company's cash moves into and out of the company. As long as a company is able to have enough cash on hand to pay its debts, there is no problem. But what if the company has debts due and has not received enough payment of its receivables to cover that debt? The company could borrow the money, but the banks might not be willing to lend it, since the company is having trouble collecting its receivables. So, what to do?
The company may decide that it just doesn't want to deal with collections and the risk of uncollectibles. It may sell its accounts receivable to a collection company, which will purchase this asset at a reduced price or discount—say, 96% of face value. The collection company is called a factor, and this sale of receivables is called factoring. Most factoring is done with recourse, meaning that the company must buy back any of the accounts receivable that prove uncollectible. If factoring is done without recourse, the company that buys the accounts receivable accepts the risk of default.