Funding Products
Invoice Factoring Explained: Turning Receivables into Cash
Factoring is the sale of your outstanding invoices to a third party at a discount. It is one of the oldest forms of commercial finance and remains the cleanest solution for businesses whose only cash-flow problem is timing.
The mechanics
You deliver work and issue an invoice. The factor advances a percentage of the face value, usually 80 to 95 percent, within a day or two. When your customer pays, the factor releases the remaining balance minus its fee.
Fees commonly run 1 to 4 percent of the invoice value per 30 days outstanding, which means the true cost depends heavily on how quickly your customers pay.
Recourse versus non-recourse
Under recourse factoring, you remain responsible if the customer never pays. It is cheaper. Under non-recourse factoring, the factor absorbs specified credit losses, and you pay a higher rate for that protection.
Read the definition of non-recourse carefully — it usually covers customer insolvency only, not disputes over the quality of your work.
Who it fits best
- Staffing agencies carrying payroll ahead of client payment
- Freight and trucking companies waiting on broker settlements
- Manufacturers and wholesalers selling on net terms
- Government and enterprise contractors with long payment cycles
- Construction subcontractors between draws
What to watch for
Look at whether the factor requires you to factor all invoices or lets you choose, whether notification to your customers is required, the minimum monthly volume commitment, and the length of the contract and its termination terms.
Frequently asked questions
- Does factoring show up as debt?
- It is structured as the sale of an asset rather than a loan, though the arrangement is disclosed and a UCC filing is standard.
- Will my customers know?
- In notification factoring they are informed and pay the factor directly. Non-notification arrangements exist but are less common and cost more.
- Can I factor a single invoice?
- Spot factoring for individual invoices is available, though rates are usually higher than under an ongoing agreement.