Invoice factoring is a financing arrangement that gives a business fast access to cash. Many small businesses in need of working capital utilize factoring as a reliable alternative to a traditional line of credit.
When cash flow strains a business, invoice factoring unlocks the value tied up in the business’s accounts receivable. Also, the term factoring is often used interchangeably with accounts receivable financing. Check out more information on how factoring works, if factoring is a fit for your business, and the how best to choose a factoring company.
How Does Invoice Factoring Work?
An invoice factoring arrangement involves three parties: The Business (the seller of invoices), The Business’s Customer (the debtor) and the Factor (factoring company).
A business sells its invoices to a third party financing partner (factor). Rather than waiting 30, 60 or 90 days for a customer to pay, funds are available to the business within 24 hours.
The five steps of invoice factoring:
- The Seller provides a service or delivers a product, then sends an invoice to the Debtor.
- The Seller submits that invoice to the Factor for funding (for example, on Day 1)
- The Factor advances between 80-90% of the invoice value to the Seller, deposited into their business bank account (for example, on Day 2)
- The Debtor mails their payment to the Factor, which goes into a lockbox in the Seller’s name (for example, on Day 25)
- The remaining 10-20% of the invoice value is released to the Seller, minus a small Factor fee (for example, on Day 26)
Factoring improves cash flow management for new and growing businesses. In addition to providing working capital, it also supports the business with credit verification and payment collections functions.
Grey Idol is the head of digital marketing for altLINE. With over five years’ experience in small business operations, content creation and digital marketing, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing. In his free time, Grey enjoys spending time outdoors with his wife and two dogs.