Factoring is the practice of selling accounts receivables to a third-party collector, known as the factor, that collects the money your clients owe you. When you sell your accounts receivables, the factor advances you a percentage of the money your clients owe upfront, typically between 80% and 95%. The amount of money you get upfront depends on your industry and the quality of your accounts.
Factoring can be especially helpful for small businesses that need cash flow immediately and would suffer a disadvantage if they had to wait 30 or 60 days for their clients to pay their invoices. Factoring is based on your clients’ credit ratings, not yours, which is a significant benefit if you own a new business and are in the process of building your credit rating.