Invoice factoring is a financing solution in which a business gets funding against its unpaid invoices, instead of waiting for customers to pay within the agreed timeline. The lender pays most of the invoice value upfront and later collects the payment directly from the buyer.
Invoice factoring helps businesses with cash flow challenges and to pay for employee salaries, raw materials, suppliers, and many other expenses to keep the business running. The customers settle their invoices, and the factoring company charges a small fee for its service.
How It Works:
- The business sells goods on credit.
- Invoices are sold to a factoring company.
- The business receives immediate funds.
- The factoring company collects payment from customers.
- Remaining amount is settled after fees.
Benefits:
- Provides immediate cash flow
- Outsources collection process
- Reduces risk of delayed payments
- Supports business expansion
Example:
A business receives Rs 8.5 lakh from a lender against a customer invoice of Rs 10 lakh, which was due in 60 days. It gets higher working capital without waiting, and the factor gets a small fee after collecting payment from the customer later.