What Is Factoring?

I've seen factoring referred to several times in listings for business related loans. Most recently in this one (full disclosure: I've bid on it)

... Usually it takes about 45 to 60 days to get your invoice processed; this is how transportation industry works. I could have factored my invoices but I am better off with prosper loan than factoring, for those of you that know about trucking industry.

Ok, so what's factoring? Fortunately, the Wikipedia knows all:

Factoring is often used synonymously with accounts receivable financing. Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount. Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30-to-90-day terms. Businesses benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold accounts receivable, less a factor's fee.

Ok, got that? I'm a business that performs a service for a customer. It's typical for customers to have 30 - 90 days (depending on the industry) to pay up. When a business factors their invoice, someone fronts them the money and then collects on the invoice after the 30 - 90 days. Sounds great, but what's the downside? The financing company charge a service fee of 1% - 5% of the invoice amount. I found a few "discount" places on the web that charge 2% for 30 days account receivables. This corresponds to a 27% APY. No wonder businesses are looking at Prosper instead of factoring.