How does accounts receivable factoring work

Question

How does AR (accounts receivable) factoring work?  What are the risks and benefits to the two parties involved?

Answer 1

Factoring is when one firm sells AR (accounts receivable) to another. The firm which is purchasing is called as a factor.  The factor earns a profit by purchasing the AR at a discount. The risk is that some of the AR might default. The selling firm receives the cash it needs.