When accounts receivable are factored: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

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When accounts receivable are factored, the accounts receivable balances are typically sold to a factor (not loaned against), and thus they are removed from the balance sheet. The customer payment is made directly to the factor, not to the firm, and there is usually a fee involved rather than interest on a loan.

When Accounts Receivable Are Factored: Money Is Advanced to the Borrower