Factoring is the sale of accounts receivable at a discount. It differs from a receivables-secured loan in ways that matter to both parties and to the account debtors.

Recourse or non-recourse. In recourse factoring the seller bears credit risk and must repurchase uncollected accounts. Non-recourse factoring shifts credit risk for approved accounts to the factor, subject to exclusions for disputes and offsets, which are the most common reason a supposedly non-recourse account comes back.

Notification. In notification factoring the account debtors are directed to pay the factor. Non-notification arrangements keep the seller’s collection relationship intact and place more risk on the factor.

Perfection. The sale of accounts is treated as creating a security interest for perfection purposes, so a factor must file a financing statement. An unperfected purchaser of accounts loses to the seller’s secured lender.

Verification. Factors verify invoices with account debtors. Fraud in this market usually involves fabricated or duplicated invoices, and verification procedures are the principal control.

Account debtor defenses. The factor takes subject to the account debtor’s defenses arising from the contract, so disputes over goods and services reduce collections regardless of the factoring terms.

Intercreditor issues where the seller also has a lender with a blanket lien.