Factoring
Factoring involves selling a business’s receivables (invoices) to a third party (called a factor) at a discount. The factor provides immediate cash to the business, and in return, the factor collects payment from the business’s customers.
How it works in detail:
• Step 1
The business delivers goods or services and issues invoices to its customers.
• Step 2
Instead of waiting for customers to pay, the business sells its invoices to a factoring company.
• Step 3
The factoring company advances a percentage (often 70-90%) of the invoice value upfront to the business.
• Step 4
The factoring company takes over the task of collecting payment from the business’s customers.
• Step 5
Once the customer pays the invoice, the factoring company gives the business the remaining balance (minus a fee for the factoring service).
Factoring helps businesses get quick access to cash while outsourcing their credit collection activities.