Factoring is a financial arrangement used to improve immediate cash flow for businesses. Through factoring, a company sells its accounts receivable, which are unpaid invoices owed by customers, to a third party known as a factor. The factor typically buys these receivables at a discount, providing the business with immediate funds rather than waiting for customers to pay. This process helps businesses maintain steady operations without relying excessively on loans or other forms of debt finance.

For example, a retailer might sell $50,000 worth of invoices to a factor for $45,000. The factor then collects the full $50,000 from the retailer's customers when payment becomes due. The retailer gains quick access to cash to cover expenses or reinvest into the business.

Factoring is especially useful for businesses that deal with long payment terms or inconsistent cash flows. It is also commonly used in industries with high accounts receivable volume, such as transportation and manufacturing. However, businesses must consider the cost of factoring, as it involves selling invoices at a discount. Integrating factoring into financial strategies can be a way to manage cash flow effectively and ensure operational liquidity.