The three parties directly involved are: the one who sells the Receivable, the debtor, and the factor. The Receivable is essentially a financial asset associated with the debtor’s Liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the Receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the Receivables essentially transfers ownership of the Receivables to the factor, indicating the factor obtains all of the rights and risks associated with the Receivables. Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. However, at times, the seller will collect the payments made by the debtor, and will remit them to the factor. The factor usually charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. The seller also estimates the amount that may not be collected due to non-payment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.
American Accounting considers the receivables sold when the buyer has "no recourse", or when the financial transaction is substantially a transfer of all of the rights associated with the receivables and the seller's monetary Liability under any "recourse" provision is well established at the time of the sale. Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.
