An invoice 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 key steps in an invoice factoring are as follows:

• The seller provides a service or delivers a product, then raises an invoice to the customer (debtor).
• The seller submits that invoice to the factor for funding (anytime before maturity).
• The factor pays a certain percentage (80-90%) of the invoice value to the seller.
• The debtor sends their payment to the factor under the seller’s name.
• The remaining percentage of the invoice value is released to the seller, minus a factoring fee.