In accounts receivable management, what does "factoring" refer to?

Factoring is the financial transaction in which a business sells its accounts receivable to a third party, known as a factor, for immediate cash. This practice allows companies to improve cash flow, meet immediate financial needs, or reduce the burden of debt collection. By selling invoices at a discount, businesses can receive cash up front rather than waiting for customers to pay their invoices.

The choice of selling receivables enables a company to focus on its core business without getting bogged down by the intricacies of collecting payments. This method is especially advantageous for businesses that may experience cash flow issues or need liquidity to support growth initiatives or cover operational expenses.

In contrast, other options like creating payment plans or extending credit involve maintaining customer relations and do not provide the immediate liquidity that factoring offers. Similarly, providing loans against receivables is distinct from factoring, which involves outright sale rather than borrowing against the assets. Thus, the correct answer accurately reflects the nature of factoring within accounts receivable management.