Dictionary of all accounting terms
Invoice factoring is when a company sells their accounts receivable to a third party, known as the factor. The sale is typically done at a discount, to acquire quick cash without the need to wait on invoice due dates.
This process is usually only done when a company needs access to cash quickly in order to cover unexpected expenses.
How does this work?
First the business needs to sell goods / services and accumulate outstanding invoices.
These unpaid invoices then can be sold to factors. Factors will verify the outstanding invoices and may offer the company, usually up to 90% of the original invoice value.
Customers who had outstanding invoices with your company, cover the invoice by paying directly to the 3rd party factor. This payment process may vary, depending on the agreed-upon terms between the company and the factor.