Invoice factoring is a financial strategy that allows businesses to sell their outstanding invoices or accounts receivable to a third-party company, known as a factor, in exchange for immediate cash.

Here’s how invoice factoring works:

• A business provides goods or services to a customer and sends an invoice for payment.
  Rather than waiting for the customer to pay the invoice, the business sells the invoice to a factor for a percentage of its value, typically between 70-90% of the total amount owed.
• The factor then takes over responsibility for collecting payment from the customer and sends the business the remaining amount owed, minus a fee for the factoring service.
• Once the customer pays the invoice, the factor deducts its fee and sends the remaining funds to the business.

Invoice factoring can be a useful tool for businesses that need to access cash quickly, without waiting for customers to pay their invoices. It can help businesses improve their cash flow and manage their working capital more effectively. Additionally, invoice factoring can help businesses avoid taking on additional debt or giving up equity in their business.

However, it’s important to carefully evaluate the costs and terms of invoice factoring before pursuing this strategy. Factors typically charge a fee for their services, which can range from 1-5% of the invoice value, depending on the industry, the creditworthiness of the customer, and other factors. Additionally, some customers may not be comfortable with the idea of their invoices being sold to a third party, which could potentially harm the business relationship.