Invoice finance, also known as invoice discounting or factoring, allows the “selling” of invoices to provide an accelerated cash flow for businesses. An invoice can be sold to a third party invoice discounting company, who then immediately provide the total required by the invoice in capital, minus a certain percentage.
When the money is eventually received from the buyer of the goods or services themselves, the invoice finance is repaid for the full value, with the factoring company able to pocket the percentage. In the meantime, the selling company has been free to use the capital.
This process provides great advantages in terms of cash flow and can avoid the problem of capital being tied down through unpaid invoices. Invoice finance is not considered a form of debt or equity, as it is considered off balance sheet financing.
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