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Invoice Factoring

A financing arrangement in which a business sells its outstanding invoices to a third party at a discount in exchange for immediate cash.

Invoicing & ARRevenue Financing

FAQs

What is the difference between invoice factoring and invoice financing?

Invoice factoring involves selling the invoice outright to the factor, which then collects directly from the customer. Invoice financing (or accounts receivable financing) uses invoices as collateral for a loan — the business retains the customer relationship and collection responsibility, and repays the loan when the customer pays. Factoring transfers collection; financing doesn't.

Does invoice factoring affect customer relationships?

In recourse factoring, customers are notified to pay the factor directly, which can sometimes feel unusual in established B2B relationships. Some factors are more discreet than others. Confidential factoring arrangements exist where the customer is unaware, but these are more expensive. Most established businesses and industries normalize factoring, so relationship impact is usually minimal.

What businesses are best suited for invoice factoring?

Factoring works best for B2B businesses (customers are creditworthy businesses, not consumers) with long payment terms (Net 30–90), consistent invoice generation, and a need for immediate working capital that outweighs the cost. It's especially common in staffing, transportation, manufacturing, and government contracting. Businesses with consumer receivables or very small invoices are less suitable.

Related Terms

Accounts Receivable

Amounts owed to a business by customers for goods or services delivered but not yet paid for.

Days Sales Outstanding

The average number of days a company takes to collect payment after a sale, measuring accounts receivable collection efficiency.

Dunning

The process of systematically communicating with customers to collect overdue payments, through a sequence of increasingly urgent reminders.

Working Capital

The difference between current assets and current liabilities, measuring a company's short-term liquidity and operational efficiency.

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Invoice factoring is a form of accounts receivable financing in which a business sells its unpaid customer invoices to a third-party factor (a factoring company) at a discount, receiving immediate cash — typically 70–90% of the invoice value — in exchange for the right to collect the full invoice amount from the customer. When the customer pays, the factor remits the remaining amount minus its fee.

The factoring process: (1) Business delivers goods/services and issues an invoice; (2) Business sells the invoice to the factor, receiving an advance (70–90% of face value); (3) The factor assumes collection responsibility; (4) Customer pays the factor directly; (5) Factor remits the reserve amount (remaining 10–30%) minus factoring fee (0.5–5% of invoice value per month) to the business.

Factoring fees depend on invoice face value, customer creditworthiness, industry, and time to collection. An effective annual rate of 15–60% is common, making factoring expensive compared to bank lines of credit but accessible to businesses that don't qualify for traditional financing due to limited operating history, low credit scores, or collateral constraints.

The two main types: recourse factoring (the business must buy back invoices if customers don't pay — less expensive, more risk to the business) and non-recourse factoring (the factor assumes bad debt risk — more expensive but protects the business from customer defaults).

Factoring is most common in industries with long payment terms — staffing, construction, trucking, manufacturing, and B2B services where net 30–90 payment terms create significant cash flow gaps. It enables companies to convert their AR into immediate working capital without waiting for customers to pay.