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How Factoring Financing Works

Factoring, also called invoice financing or invoice funding, is a type of financial transaction where a business exchanges rights to collect on an invoice for an up-front cash payment. Factoring is a great alternative to traditional financing options like loans or lines of credit, and is a quick way for a business to get cash it needs for operations, payroll, or purchasing inventory.

In a finance factoring transaction, you’ll send the invoices you hope to sell to a factoring company. They verify the invoices and your customers’ credit ratings, and then “buy” the invoices from you at a discounted rate. Funding invoices can take as little as a few days, but often takes up to a week. The invoices are assigned to the factor finance company, and your customers will send payments to the company, not to your business. Once the invoices have been paid, the factoring company sends the balance left on the invoice less a factoring fee.

Factoring isn’t for every company. Make sure you know the risks and costs involved before agreeing to a factoring transaction.