How does accounts receivable factoring work, Financial Management

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How does accounts receivable factoring work? What are the benefits to the two parties involved? What are the risks?

Factoring is when one firm trade accounts receivable (AR) to another. The purchasing firm is called as a factor. The factor makes a profit by buying the AR at a discount. Its risk is that few of the AR may default. The selling firm obtains the cash it needs.

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