An invoice creates an account receivable.
Invoice factoring involves the sale of one business's accounts receivables to a financing company at a discounted rate. Doing this shifts credit risk, and potentially bad debt, to the financing company.
Involved Parties
Three parties comprise the invoice factoring relationship. The customer, or debtor, owes money to the business for products or services received. After a period of non-payment, the business turns to a financing company, or factor, specializing in invoice factoring.
Benefits
Using invoice factoring, a business gains immediate cash flow. Factoring also reduces time and resources previously dedicated to the debt-collection process and may improve the business's credit rating.
Disadvantages
Under factoring-agreement terms, businesses give up accounts receivable at a discount. Also, because factors will be dealing with a business's customers, a business's reputation could be at risk because of strained relationships between the factor and customers.
