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What is Factoring?
Factoring is a method of business funding. A business that has outstanding customer invoices sells these invoices to a finance company (factor) at a discount on the amount of the invoice.
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How is Factoring Used?
Factoring is used to provide faster payment to the business for outstanding customer invoices. Rather than wait on the customer to pay the invoice, the business is able to obtain immediate payment be selling the invoice to the factor. The factor then seeks to collect the amount of the invoice from the customer. If the factor collects the full amount, it made a profit equal to the amount of discount for which it bought the invoice.