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Invoice Factoring Definition

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An invoice creates an account receivable.

Invoice factoring involves the sale of one business's accounts receivables to a financing company at a discounted rate. Doing this shifts credit risk, and potentially bad debt, to the financing company.

  1. Involved Parties

    • Three parties comprise the invoice factoring relationship. The customer, or debtor, owes money to the business for products or services received. After a period of non-payment, the business turns to a financing company, or factor, specializing in invoice factoring.

    Benefits

    • Using invoice factoring, a business gains immediate cash flow. Factoring also reduces time and resources previously dedicated to the debt-collection process and may improve the business's credit rating.

    Disadvantages

    • Under factoring-agreement terms, businesses give up accounts receivable at a discount. Also, because factors will be dealing with a business's customers, a business's reputation could be at risk because of strained relationships between the factor and customers.

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References

  • Photo Credit Blue pen in front of invoice image by millann from Fotolia.com

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