What is invoice factoring?
Invoice factoring is type of invoice finance where you "sell" some or all of your company's outstanding invoices to a third party as a way of improving your cash flow and revenue stability. A factoring company will pay you most of the invoiced amount immediately, then collect payment directly from your customers. There are benefits and disadvantages to invoice factoring, which we'll cover in this article.
Invoice factoring is also referred to as accounts receivable factoring or debt factoring.
How does factoring work?
Invoice factoring means selling your account receivable either in part or in full. It works like this:
You provide goods or services to your customers in the normal way.
You invoice your customers for those goods or services.
You "sell" the raised invoices to a factoring company. The factoring company pays you the bulk of the invoiced amount immediately, typically up to 80-90% of the value, after verifying that the invoices are valid.
Your customers pay the factoring company directly. The factoring company chases invoice payment if necessary.
The factoring company pays you the remaining invoice amount – minus their fee – once they've been paid in full.