Invoice Factoring — What It Is and How It Can Benefit Your Business
Published: November 26, 2025
Summary: Learn about invoice factoring and how it can improve your cash flow. This blog explains how invoice factoring works, the benefits, and how businesses can use it to manage their finances effectively.
Invoice factoring is a financial strategy that allows businesses to access immediate cash flow by selling their outstanding invoices to a third-party company, known as a factor. This practice can help businesses that need fast capital but are waiting on customer payments. In this blog, we’ll dive into the concept of invoice factoring, how it works, and the benefits it offers to businesses looking for a reliable cash flow solution.
What is Invoice Factoring?
Invoice factoring is a financial arrangement in which a business sells its unpaid invoices to a factoring company at a discounted rate. The factor provides the business with immediate cash, typically up to 90% of the invoice value, while the factor assumes responsibility for collecting the outstanding payments. Once the customer pays the invoice, the factoring company forwards the remaining balance, minus a factoring fee.
How Does Invoice Factoring Work?
Here’s a step-by-step overview of how invoice factoring works:
- Step 1: The business provides products or services and issues an invoice to the customer.
- Step 2: The business sells the invoice to a factoring company for immediate cash.
- Step 3: The factoring company advances a percentage of the invoice value (usually 80%-90%).
- Step 4: The customer pays the factoring company the full invoice amount.
- Step 5: The factoring company releases the remaining amount, minus the factoring fee.
Benefits of Invoice Factoring
Invoice factoring offers numerous benefits to businesses, especially those struggling with cash flow or waiting on customer payments:
- Immediate Cash Flow: Invoice factoring provides businesses with instant access to working capital, reducing the wait for customer payments.
- Outsource Collection Efforts: The factoring company takes over the task of collecting payments, allowing you to focus on your business operations.
- Flexible Financing: Factoring grows with your business. The more invoices you generate, the more capital you can access.
- Improve Credit Score: With timely payments, factoring can help improve your business’s credit score by reducing financial strain.
When to Use Invoice Factoring
Invoice factoring can be a good option for businesses that face cash flow issues due to slow-paying customers or those in industries where payment delays are common. It's particularly useful for businesses that are growing quickly and need immediate capital to maintain operations or expand.
Frequently Asked Questions
What is the difference between invoice factoring and a bank loan? Invoice factoring involves selling invoices for immediate cash, while a bank loan requires you to borrow money and pay it back with interest. Factoring is not a loan and doesn’t require collateral.
How much does invoice factoring cost? The factoring company charges a fee, typically between 1% and 5% of the invoice value, depending on the volume of invoices and the risk associated with the customer base.
Is invoice factoring right for my business? Invoice factoring can benefit businesses that need quick access to capital and are experiencing delays in receiving payments. It’s important to weigh the cost of factoring against the benefit of improved cash flow.
Start using invoice factoring to improve your cash flow today with Invozee.