Also known as: accounts receivable factoring, AR factoring, factoring
Invoice factoring is a form of financing in which a business sells its unpaid B2B invoices (its accounts receivable) to a third party called a factor, at a discount, in exchange for immediate cash. The factor advances most of the invoice value upfront — typically 70% to 90% — then collects payment from the customer and returns the remainder minus its fee. It turns net-30, net-60, or net-90 receivables into same-week cash without taking on traditional debt.
The business delivers its product or service and issues an invoice with standard payment terms. Instead of waiting weeks or months to be paid, it sells that invoice to a factor, which advances a percentage of the face value within a day or two. When the customer eventually pays the invoice, the factor releases the held-back reserve to the business and keeps a factoring fee (often a small percentage per 30 days outstanding). Because approval rests mainly on the creditworthiness of the customers who owe the invoices — not the business itself — factoring is accessible to young or thinly-capitalized companies that could not qualify for a bank loan.
Factoring is not a loan and adds no debt to the balance sheet — it is the sale of an asset (the receivable). A loan is repaid by the borrower on a schedule with interest; a factored invoice is repaid by the borrower's customer when they settle the invoice. Approval hinges on the customers' credit rather than the borrower's, and funding is fast because there is collateral built in. The trade-off is cost: the effective rate of factoring is usually higher than bank financing, and in recourse factoring the business must buy back invoices the customer never pays.
For industries that bill other businesses on long terms — staffing, security guards, trucking, roofing, manufacturing — factoring bridges the gap between doing the work and getting paid, which is where most cash-flow crunches come from. For commercial lending brokers, it is one of the most-requested products among clients with B2B receivables.
No. Factoring is the sale of your unpaid invoices to a factor, not borrowed money, so it adds no debt to your balance sheet. The factor is repaid when your customer pays the invoice, not by you on a fixed schedule.
Factors typically advance 70-90% of the invoice upfront and charge a fee of roughly 1-5% per 30 days the invoice stays unpaid. The effective annualized cost is higher than a bank loan, which is the price of speed and not needing strong business credit.
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