Short answer
No, conventional invoice factoring is not halal. Selling a $10,000 invoice to a factor for $9,500 cash today is exchanging money for less money, with a delay, which is riba. Halal alternatives include paying a collection agent a fixed fee, Islamic trade finance through murabaha or salam, or asking your customer to pay early.
Selling a debt for cash to someone other than the debtor is invalid, and selling it at a discount adds riba. Appointing an agent to collect debts for a fixed fee is permitted. A creditor reducing a deferred debt in return for early payment, when it is stipulated, is not permitted in the Hanafi school.
Other madhhabs
- Hanbali
- The relied-upon Hanbali view also forbids reducing a deferred debt for early payment; Ibn Taymiyya and Ibn al-Qayyim, following a report from Imam Ahmad, allowed it.
Explanation
Many small businesses wait 30 to 90 days to be paid. Factoring companies buy the invoices at a discount and collect the full amount later. The price of the deal is the time value of money, which is exactly what riba is. Invoice discounting and receivables financing with interest are the same.
Halal options for cash flow:
- Collection agency for a fee: a firm collects your invoices and charges a fixed or service-based fee. That is agency (wakalah) and permitted, so long as the fee is not really a charge for advancing you money.
- Islamic trade finance: an Islamic bank buys raw materials or stock and sells them to you on deferred payment (murabaha), or pays in advance for goods you will deliver (salam).
- An interest-free loan from a partner, family member or community fund.
- Taking a partner: an investor joins the business for a share of profit. See What is musharakah?
Early payment discounts: a seller may freely give a discount when a buyer happens to pay early. Writing "2% off if paid within 10 days" into the terms of the sale is debated: Mufti Taqi Usmani and many Hanafi muftis say a discount for early payment may not be stipulated, while some scholars treat it as a choice between two prices settled before the sale. The International Islamic Fiqh Academy allows reducing a deferred debt for early payment when it is not agreed in advance.
Ask a mufti or an Islamic finance adviser before signing a finance agreement. See also What is murabaha? and What is a salam sale?
Ask a mufti about your own case. This answer explains the general ruling. When the details of your situation matter, as they do here, ask a qualified mufti and give them the full facts. Where to ask a scholar.
The evidence
Quran, Surah Al-Baqara 2:279
فَإِن لَّمْ تَفْعَلُوا۟ فَأْذَنُوا۟ بِحَرْبٍۢ مِّنَ ٱللَّهِ وَرَسُولِهِۦ ۖ وَإِن تُبْتُمْ فَلَكُمْ رُءُوسُ أَمْوَٰلِكُمْ لَا تَظْلِمُونَ وَلَا تُظْلَمُونَ ﴿٢٧٩﴾
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal - [thus] you do no wrong, nor are you wronged.
A debt is settled at its amount, not traded for profit.
Quran, Surah Al-Baqara 2:275
ٱلَّذِينَ يَأْكُلُونَ ٱلرِّبَوٰا۟ لَا يَقُومُونَ إِلَّا كَمَا يَقُومُ ٱلَّذِى يَتَخَبَّطُهُ ٱلشَّيْطَٰنُ مِنَ ٱلْمَسِّ ۚ ذَٰلِكَ بِأَنَّهُمْ قَالُوٓا۟ إِنَّمَا ٱلْبَيْعُ مِثْلُ ٱلرِّبَوٰا۟ ۗ وَأَحَلَّ ٱللَّهُ ٱلْبَيْعَ وَحَرَّمَ ٱلرِّبَوٰا۟ ۚ فَمَن جَآءَهُۥ مَوْعِظَةٌۭ مِّن رَّبِّهِۦ فَٱنتَهَىٰ فَلَهُۥ مَا سَلَفَ وَأَمْرُهُۥٓ إِلَى ٱللَّهِ ۖ وَمَنْ عَادَ فَأُو۟لَٰٓئِكَ أَصْحَٰبُ ٱلنَّارِ ۖ هُمْ فِيهَا خَٰلِدُونَ ﴿٢٧٥﴾
Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein.
Buying debts at a discount is not trade but a charge for time.
Sahih Muslim 1587
Sahih... الذهب بالذهب والفضة بالفضة ...
"Gold for gold and silver for silver."
Money exchanged for the same kind of money must be equal and on the spot.
Sahih al-Bukhari 2177
Sahih... ولا تبيعوا منها غائبا بناجز ...
"And do not sell any of it that is absent for what is present."
A deferred amount of money cannot be sold for cash now.
Where the ruling is recorded
- al-Hidaya, Kitab al-Buyu', on the sale of debts. Sale of a debt to a third party is invalid.
- AAOIFI Shari'ah Standards, Standard on debt settlement by set-off, and on sale of debt. Debts may be transferred only at face value.
- Resolutions of the International Islamic Fiqh Academy, Resolution on instalment sales. Reducing a deferred debt for early payment when not stipulated.
Checked by our team. For a more accurate answer to your own situation, consult a scholar. Quran translation by Sahih International. Hadith Arabic from the standard editions of the six books and the Muwatta, with gradings as recorded there; the English is our own rendering. Spotted a mistake? Tell us.