An invoice factoring (factoring) is a type of invoice finance where a company sells part or all of its outstanding invoices (accounts receivable) to a third party (known as a factor or factoring company) as a means by which it aims to improve its cash flow and revenue stability. A factoring company will pay a percentage of the invoiced amount immediately (e.g., 80%- 90% of stated value), then collect payment directly from the debtors (customers on credit). The difference between the stated value of the invoices and the selling value (the value or price for which these invoices are sold) constitutes the discount amount.
The main parties to a factoring transaction are:
- The seller- i.e., the company seeking to sell its receivables in the market.
- The debtor- i.e., the company’s customer owing it a certain amount (the receivables).
- The factor (factoring company)- i.e., a financing partner that purchases a business’ invoices in exchange for cash (a monetary amount). The business sells part or all of its outstanding receivables to improve its working capital and related cash flows, and avoid a delay of long payment terms.
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