Factoring is the purchase of an invoice at a discount for a small fee.
The factor (factoring company) is the person/business that pays immediate cash for the invoice(s) against their client’s debts. This process enables the small business owner to get instant cash flow that would otherwise be tied up whilst waiting for their debtors (their customers) to pay their outstanding invoice(s).
Unlike a business loan, factoring does not incur any interest fees. The minimal fees that are charged are varied and are solely based on the volume (size) of the invoice(s), the type of invoice(s), who the invoices are billed to and the time in which it takes for the customer (debtor) to pay the invoice(s).
As a general rule, a transaction may typically reflect the following scenario:
An invoice for $100 will be sold to the factoring business. They will advance 80% against the invoice initially and pay the balance of the invoice when the invoice is paid by the customer (less the small discount fee).The Factor keeps the small fee for processing and managing the transaction(s).