Invoice financing, also known as accounts receivable financing or factoring, is a type of financial arrangement in which a business sells its outstanding invoices or accounts receivable to a third-party financier, known as a factor, in exchange for immediate cash.
In other words, a company that provides invoice financing will pay a business a percentage of the value of its outstanding invoices, typically ranging from 70% to 90%, upfront. The factor will then collect the full amount of the invoices from the business’s customers and pay the remaining balance, minus fees and interest, to the business.
Invoice financing is often used by small and medium-sized businesses that need cash flow to meet their immediate financial obligations, such as paying suppliers, employees, or rent. It is also a popular option for businesses that have long payment cycles or have customers who are slow to pay their invoices.
One of the main advantages of invoice financing is that it provides businesses with immediate access to cash without having to wait for their customers to pay their invoices. It also allows businesses to outsource the collection of their invoices, which can save time and resources. However, it is important for businesses to carefully consider the fees and interest rates associated with invoice financing before entering into any agreements.