Invoice factoring can be defined as a financial transaction where a particular business sells all its accounts receivable to a company in order to free up their cash reserves. This is done to secure working capital for meeting expenses, expand sales or to cover up payroll. Terms like “receivables financing”, “Invoice financing” or “accounts receivable financing” are used interchangeably while referring to Invoice Factoring.
How does it work?
After any company delivers their services or products to their designated customer, an invoice is issued by the company. The invoice is then sold off to the “factor” who gives an advance of about 70%-90% of the value of the invoice to the company. This received value is very helpful for maintaining the overheads of the company while waiting for to get more work/orders. After the outstanding invoice is paid by the debtor, the business gets a rebate for the remaining funds minus the fee based on the value of the invoice and its term. All parties benefit from the same.
Pros and Cons
Nothing is free of pros and cons and Invoice Factoring is no different in that respect.
A couple more points to keep in mind-
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