Factoring, also referred to as receivables finance or invoice finance, allows businesses to receive immediate payment for outstanding invoices. Instead of waiting 30, 60, or 90 days for customers to pay, businesses sell their invoices to a financial institution at a discount in exchange for immediate liquidity.
What It Is #
When a business delivers goods or completes a service, it issues an invoice. Under normal circumstances, that invoice becomes cash only when the customer pays — often weeks or months later. Factoring eliminates that wait by converting outstanding invoices into immediate working capital.
The business sells its invoices to a factor at a small discount. The factor advances the majority of the invoice value upfront — typically 80–90% — and collects payment directly from the customer when the invoice becomes due. Once collected, the factor releases the remaining balance to the business, minus a fee.
Factoring is supplier-initiated, meaning the business seeking liquidity drives the arrangement. This distinguishes it from reverse factoring, where the buyer sets up and anchors the program.
How It Works #
- Business issues an invoice to its customer for goods or services delivered.
- Business submits the invoice for factoring.
- The factor advances 80–90% of the invoice value, typically within 24–48 hours.
- The factor manages or monitors collections and waits for the customer to pay.
- Customer pays the invoice on the due date directly to the factor.
- The factor releases the remaining balance to the business, minus the factoring fee.
Recourse vs. Non-Recourse Factoring #
| Dimension | Recourse Factoring | Non-Recourse Factoring |
|---|---|---|
| Who bears bad debt risk | The business (seller) | The factor |
| Cost | Lower fees | Higher fees |
| Best for | Businesses with reliable customers | Businesses in higher-risk industries |
| Credit protection | Not included | Included |
Key Benefits #
- Immediate liquidity without taking on debt
- No collateral required beyond the invoices themselves
- Scalable — financing grows with sales volume
- Reduces collections burden when using full-service factoring
- Accessible to businesses with limited credit history, since approval is based on customer quality
Who Should Use Factoring #
Factoring is well-suited for:
- Fast-growing businesses with strong sales but tight cash flow
- Seasonal businesses that need to bridge off-peak periods
- Exporters dealing with long international payment terms
- SMEs that cannot access affordable bank credit