Final answer:
Factoring is a financial transaction where a company sells its accounts receivable to a third party for immediate cash flow. Factors provide funds in exchange for a fee or discount on the invoices. Purchasing with or without recourse determines whether the company or the factor is responsible for uncollectible invoices.
Step-by-step explanation:
Factoring is a financial transaction in which a company sells its accounts receivable (invoices) to a third party, called a factor, at a discount. This allows the company to obtain immediate funds instead of waiting for customers to pay their invoices. The factor then collects the payments from the customers.
A factor is a financial institution or company that purchases accounts receivable from businesses. The factor provides immediate cash flow to the company by advancing a percentage of the accounts receivable amount. In return, the factor charges a fee or discount on the outstanding invoices.
Purchasing with recourse means that the company retains the responsibility for any uncollectible invoices. If a customer fails to pay, the company must reimburse the factor for the amount advanced. On the other hand, purchasing without recourse means that the factor assumes the risk of non-payment. If a customer fails to pay, the factor absorbs the loss.