What is invoice factoring?

T he invoice factoring is a financial process and transaction by which a company sells its due invoices it a factoring company to get cash that is outstanding from the customer. The cash procured by the company turning in the invoices later pay a fee to the factor after getting its outstanding invoice from the customer.

Why is invoice factoring needed?

Invoice factoring provides a business company with capital to expand the business, pay its employees, do business transactions, gain and work on profitable opportunities when it is waiting to be paid by its customer or account debtor and hence is without cash or capital. Invoice factoring involves three parties:

• the business company
• their customer (the account debtor)
• the factoring company (the factor)

How does invoice factoring take place?

The invoice issued by the business party to a customer after selling them goods or services is sold by the business party itself to a factoring company. On receiving the sold invoices, the factoring company pays an advance of 70-80% of the invoice value against a time limit of 30, 60, or 90 days. With the 70-80% of their invoice value in hand, the business company is able to move on with its daily business transactions until the outstanding invoice from the account debtor comes in. When the business company is paid by the account debtor, the factor receives the payment. Then the factoring company forwards the remaining 20-30% amount of the invoice after subtracting their fee as the factoring or financier company. [Photo: haikudeck.com]