Factoring, in the context of finance and accounting, refers to a financial transaction where a company sells its accounts receivable, or outstanding invoices, to a specialized financial institution known as a factor. This is done to receive immediate cash or working capital, instead of waiting for customers to pay their invoices, which can often have extended payment terms.

Here's how factoring typically works:

1. Invoice Generation: A business delivers goods or services to a customer and generates an invoice that specifies the payment terms, such as a due date (e.g., 30, 60, or 90 days).

2. Selling Invoices: Instead of waiting for the invoice to be paid, the company sells one or multiple invoices to a factoring company at a discount. The factor advances a significant portion of the invoice's value (usually around 80% to 90%) to the selling company immediately.

3. Collection by the Factor: The factor becomes responsible for collecting the full amount of the invoice from the customer on the specified due date. This includes the original invoice amount, minus the factor's fee or discount.

4. Remaining Payment: Once the factor collects the full payment, they subtract their fee, which is usually a percentage of the invoice's face value, and transfer the remaining balance to the selling company. This balance is known as the "reserve."

Factoring is often used by companies that face cash flow challenges, need working capital for immediate expenses, or prefer to outsource the collection of their receivables. It can be especially beneficial for small and medium-sized businesses, as it provides a reliable source of cash without the need for additional debt.