What is Invoice factoring?

Invoice factoring is a financial transaction in which a company sells its accounts receivable (invoices) to a third party (called a factor) at a discount in order to obtain immediate cash.

Businesses that sell invoices to third parties for early collection of receivables after selling goods and services to customers are known as “invoice factoring.” The collection liability is with a third party after those invoices are sold.

This is used by businesses that do not want to wait for credit sales to be collected. The third party pays the business 70-80% of the invoice as settlement and earns 20%-30% commission as invoice factoring income for taking on the invoice collection risk. Because of the consistent flow of revenue, it improves the business’s cash flow.

Businesses can also use this to expand without incurring debt or using equity. They also do not have to struggle to obtain bank financing because there is no need for security to generate upfront cash. This is used to boost cash flow and accelerate growth.

Did you know?

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