Factoring

noun (uncountable); also gerund

/ˈfæktərɪŋ/

A financial service in which a business sells its accounts receivable (outstanding invoices) to a third party — the factor — at a discount in exchange for immediate cash, transferring the credit risk and collection responsibility to the factor. Factoring improves the liquidity and working capital of the seller, particularly for MSMEs that face long payment cycles from large buyers. In India, the Factoring Regulation Act, 2011 (amended 2021) provides the legal framework; the Trade Receivables Discounting System (TReDS), launched by the RBI in 2016, is a digital factoring platform enabling MSMEs to discount trade receivables through multiple financiers.

✍️ Usage in a UPSC answer

The mandatory onboarding of large firms onto the TReDS platform under the MSME Development Act amendment ensures that MSME suppliers can access factoring for receivables within 45 days, reducing working capital stress across the vendor ecosystem.

Synonyms

invoice discountingreceivables financingaccounts receivable purchasetrade finance

Antonyms

self-financingretained receivableslong-term debt financing

🌱 Word Family

factor (noun/verb), factored (adjective), factor rate (noun phrase), factoring company (noun phrase), invoice discounting (related term)

🔡 Root

Latin factor = doer, maker, from facere = to do, make; -ing = gerund/activity suffix

📜 Etymology

From Latin factor (one who acts), derived from facere (to do, make). In medieval commerce, a factor was a merchant agent who acted on behalf of principals in foreign ports, managing receivables. The financial service of purchasing receivables at a discount evolved from these mercantile practices and became formally structured in 20th-century American and British commercial banking.

🧠 Memory Hook

A FACTOR is a middleman who ACTS (facere = to do) for you. In factoring, the factor ACTS as your collection agent and pays you NOW for invoices you'd collect LATER, taking a fee for the service.

💰 Indian Economy 📖 Seen in: Indian Economy — Growth, Planning & De...

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