Invoice factoring is a form of short-term financing in which a business sells its invoices to a factoring company in exchange for a cash advance. Businesses with outstanding invoices of less than 90 days can receive as much as 90% of the value of the invoice used as collateral by the factoring company. The rest is held in reserve by the factoring company. The factoring company takes on the responsibility of collecting payment from the invoiced customer, and upon receiving payment, remits the balance of the invoice amount less a factoring fee of 1 to 3% per month.
Invoice factoring has been used for several centuries as a way for businesses to avoid cash flow shortages while waiting for invoices to be paid. Businesses with no or poor credit can qualify for invoice factoring because the factoring company relies on the creditworthiness of the invoiced customer.