Factoring
The sale of accounts receivable to a third-party funder at a discount, in exchange for immediate cash. Distinct from a loan, since the receivable is sold rather than pledged.
Recourse and non-recourse
In a recourse facility, the seller remains responsible if the customer fails to pay. In a non-recourse facility, the factor absorbs credit losses on approved customers, generally at a higher discount rate.
Most middle-market factoring facilities operate on a recourse basis with credit insurance bolted on, which is structurally similar to non-recourse but priced more efficiently.
When factoring is the right answer
Factoring is the right answer when the business has creditworthy customers, a working-capital gap driven by payment terms, and either does not qualify for a bank line or wants the operational support (collections, credit, invoicing) that factors typically bundle in.