What is Invoice Factoring?

Full Definition

Invoice factoring is a way for a business to unlock cash tied up in unpaid customer invoices rather than waiting 30, 60 or 90 days for payment. The business sells its invoices to a factoring company, which typically advances 80-90% of the invoice value immediately, then pays the remaining balance (minus its fee) once the customer settles. Unlike invoice discounting, factoring is usually disclosed -- the factoring company takes over collecting payment directly from the business's customers, which can affect how customers perceive the relationship, though confidential factoring arrangements also exist. It is commonly used by growing businesses, especially in sectors with long payment terms such as manufacturing, recruitment and haulage, to smooth cash flow without taking on a traditional business loan. Costs include a service fee (a percentage of turnover) and a discount fee (similar to interest, charged on the advanced amount for the time it is outstanding), so factoring is generally more expensive than a bank overdraft but does not require the same collateral or lengthy approval process, and the funding line grows automatically as sales grow.

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