Invoice factoring, also known as accounts receivable factoring,  is a financial arrangement in which a company sells its accounts receivable, or outstanding invoices, to a third-party funding source known as a factor. The factor purchases the invoices at a discounted rate, providing immediate cash to the company. Instead of waiting for customers to pay their invoices on their normal payment terms, the company receives a percentage of the invoice value upfront.

Once the factoring company buys the invoice, they take over the responsibility of collecting payment from the customer on the invoice due date. When the customer pays the invoice, the factoring company releases the remaining balance, minus their fees and charges, back to the business.

Invoice factoring can provide immediate cash flow to businesses that are waiting for payment on outstanding invoices. This financing option is especially useful for businesses that have long payment cycles, such as staffing agencies or other service-based businesses, that need to pay their employees or suppliers while waiting for their clients to pay their invoices.

By utilizing invoice factoring, manufacturing companies can overcome cash flow gaps caused by long payment cycles and benefit from immediate access to working capital. It offers an alternative to traditional bank loans or lines of credit, as factoring decisions are primarily based on the creditworthiness of the company’s customers, rather than the company’s credit history or collateral. This makes invoice factoring a viable funding option for businesses that may have limited credit or a short operating history.