Invoice factoring or invoice discounting, also known as accounts receivable factoring, is a financial arrangement where a business sells its accounts receivable or current unpaid invoices to a third-party company called a factor.

In this process, the factor advances a significant portion of the invoice value to the business, providing immediate cash flow. The factor then assumes the responsibility of collecting payment from the customers.

The term "factor" has been traditionally used in the financial industry to describe entities that provide financing or undertake certain financial activities.

In the case of invoice factoring, the factor plays a crucial role in facilitating the conversion of accounts receivable into immediate cash, enabling businesses to address their cash flow needs.

• Cash flow improvement: Invoice factoring helps businesses improve their cash flow by converting their accounts receivable into immediate cash. Instead of waiting for customers to pay, businesses can access funds upfront, allowing them to cover operational expenses, invest in growth, and meet financial obligations.
• Factor's fee: The factor charges a fee for its services, which is typically a percentage of the invoice value. The fee varies based on factors such as the creditworthiness of the customers, the volume of invoices, the industry, and the duration of payment terms.
• Risk transfer: Once the factor purchases the invoices, it assumes the risk of non-payment. If the customer fails to pay the invoice, the factor absorbs the loss. This aspect can be advantageous for businesses as it helps mitigate the risk of bad debt.
• Customer relationships: In invoice factoring, the factor takes over the collection process, which includes interacting with the customers to collect payment. Depending on the type of factoring arrangement (recourse or non-recourse), the factor may have recourse to the business if the customer fails to pay.