What does factoring involve?

Factoring involves the selling of accounts receivable for cash. In a factoring arrangement, a business accepts immediate cash from a third-party financial institution in exchange for their outstanding invoices. This allows the business to improve its cash flow quickly, turning what would be a delayed payment into instant liquidity.

This process is beneficial for companies that require funds to cover operational costs, invest in growth opportunities, or manage other expenses without waiting for their customers to pay their invoices. The factoring company then takes on the responsibility of collecting the receivables, assuming the risk associated with potential non-payment by the customers. This makes factoring a strategic tool for businesses seeking to optimize their cash flow management.