Factoring is the selling of acounts receivable by the business holding them (to obtain cash payment of the accounts before their actual due date) to a specialized agency known as a Factor. Factoring differs from borrowing inthat the accounts receivable are actually sold rather than merely offered as collateral. Essentially, there are two types of factoring: Recourse and Non-Recourse.

In Non-Recourse Factoring, once the Factor has purchased the receivable, the risk of loss due to insolvency/bankruptcy on the part of the seller's client (debtor account) is no longer with the seller, but becomes the risk of the Factor. As such, Non-Recourse Factoring transaction are not subject to state usuary laws.

In Recourse Factoring, if a debtor account does not pay his invoice, the Factor can go back to the seller for payment. Because the credit risk ultimately stays with the seller in Recourse Factoring, rates of interest are governed by the usury laws of the state in which the transaction takes place.

It should be obvious at this point the difference between the two and that Factors may charge fees accordingly in one case but not in the other. Additionally, factors will make every effort to reduce their risk through their due diligence efforts.