Invoice factoring is an act of assigning a third-party business to convert all your outstanding invoices into cash. The company that buys your invoice debt is called a factoring company. The factoring company pays you an amount equivalent to what the invoices are worth, minus a fee (in percentage or dollar). The benefit of factoring is that you get paid sooner.
To factor an invoice, it must have a term of 30 to 90 days. Then, under Factoring Details of the invoice page, select a Factoring Company, enter the Factoring Rate, and select ‘%’ or ‘$’ on how you like to pay the fee to the factoring company to generate a factoring invoice. You can set a company as your default factoring company and generate all the factoring invoices under that company.
Here's how you factor an invoice:
Here’s an example of how factoring invoice works:
Let’s say your customer owes you on a $20,000 invoice, payable in 60 days. So you factor that invoice to a factoring company. The factoring company advances you 90% of that invoice, or $18,000, and holds the remaining $2,000 as a reserve. Now, your customer pays the invoice, $20,000, to the factoring company. The factoring company takes its factoring fee, $600 (assuming 3%). They pay the balance $1400 of the invoice to you. The total you receive will be $19,400 ($20,000 - $600).