Factoring - also known as 'debt factoring' - involves selling your invoices to a third party. In return they will process the invoices and allow you to draw funds against the money owed to your business. Essentially, these companies provide a finance, debt collection and ledger management service.
It is commonly used by businesses to improve cashflow but can also be used to reduce administration overheads. Businesses that supply this service are called factors or debt factoring companies.
Invoice discounting is an alternative way of drawing money against your invoices. However, your business retains control over the administration of your sales ledger.
This guide outlines how factoring and invoice discounting work, the advantages and disadvantages, different types of factoring and invoice discounting, and how to choose a factor or discounter.