Invoice Factoring

How invoice factoring works

Factoring turns your accounts receivable into immediate cash. You sell an unpaid invoice to a factoring company, called the factor. The factor advances most of the face value right away, often between 75% and 90%, and takes over collecting from your customer. When the customer pays, the factor sends you the remainder minus its fee.

The appeal is simple: invoices stop sitting on paper for 30, 60 or 90 days and start funding payroll now. For a business whose cash flow problem is timing rather than profitability, that can decide whether the next order is taken or turned down.

Recourse vs non-recourse: who eats the bad debt

With recourse factoring, you keep the credit risk: if your customer never pays, the factor sells the invoice back to you and you repay the advance. With non-recourse factoring, the factor absorbs the loss if the customer becomes insolvent, and charges more for that risk. Either way, read the fine print: non-recourse protection typically covers customer insolvency, not disputes about your work.

The honest cost math

Factoring fees look tiny because they are quoted per 30 days, not per year. A 2% discount per 30 days annualizes to roughly 24%, and the effective rate is higher still, because the fee is charged on the full invoice while you only received part of it up front.

Work one round example. You factor a $100,000 invoice at 2% per 30 days with an 80% advance, receiving $80,000 today. Your customer pays after 60 days, so the fee is 4%, or $4,000, and the factor sends you the final $16,000. You paid $4,000 to use $80,000 for two months: about 30% annualized, credit card territory rather than bank loan territory.

When factoring fits, and when it is a warning sign

Factoring genuinely fits one profile: a business growing faster than it can finance itself, selling to large, creditworthy customers who pay reliably but slowly, without the collateral or track record for a bank line of credit. Then it is a steep but temporary price to keep working capital turning while you grow into cheaper financing.

It is a warning sign when factoring covers losses rather than timing gaps. An unprofitable business that factors is converting tomorrow's revenue into today's spending at 25% or more per year, and the hole deepens every cycle. Factored cash is not new money; it is your own money, earlier and smaller.

Your customers will notice

Because the factor collects directly, your customers now deal with a factoring company instead of you, and they will notice. Some read it as routine industry practice, others as a sign of cash trouble, so give key accounts a heads-up.

Factoring vs invoice financing

Invoice financing is borrowing against your receivables rather than selling them: the invoices stay yours, you keep collecting, and you repay the lender when customers pay. Factoring is an outright sale, collections included. Financing is quieter and usually cheaper for established businesses; factoring bundles in credit checks and collections work, which is part of what you pay for.