Definition (canonical)
Factoring is selling your unpaid invoices to a financing company (the factor), which pays you most of the value immediately and collects from your customer at maturity. It converts payment terms into cash on hand — you trade a margin for liquidity and, in some variants, for protection against non-payment.
How a transaction runs
You deliver and issue a 10,000 invoice at net 60 → the factor advances typically 80–90% within a day or two → your customer pays the factor at maturity → you receive the remainder minus fees. Customers are normally notified (silent variants exist), and factors verify buyers before accepting invoices — which quietly adds a layer of counterparty screening to your sales process.
Recourse vs non-recourse — the decision that matters
Recourse factoring: if your customer never pays, the debt returns to you — cheaper, pure liquidity play. Non-recourse: the factor absorbs insolvency risk of the buyer — pricier, but it bundles financing with credit insurance; for firms with concentrated receivables this risk transfer can matter more than the cash acceleration. Other flavors: reverse factoring (buyer-initiated, supporting suppliers of large firms), selective/spot factoring (single invoices, no volume commitment), export factoring (cross-border collection handled by the factor's network).
Costs and the honest comparison
Pricing combines a commission per invoice (roughly 0.2–3% depending on volume, terms and risk) plus interest on the advanced amount for the days outstanding. Annualized, factoring usually costs more than a secured credit line — but the comparison is unfair to it: a line requires collateral and credit history, while factoring scales with your SALES (the factor underwrites your buyers, not you), making it accessible to young, fast-growing firms whose working capital gap widens with every new order. Rule of thumb: chronic gap from growth and long terms → factoring fits; one-off shortfall → cheaper instruments first.
FAQ
Does factoring signal financial trouble? That stigma is dated — supply-chain finance is standard in corporate ecosystems. What signals trouble is hiding problems, not financing receivables.
Which invoices qualify? B2B, undisputed, assignable (watch contract clauses banning assignment) and within the factor's buyer limits. Consumer receivables generally do not.
Factoring vs invoice discounting? Same economics; discounting is confidential and you keep collections — usually reserved for larger firms with proven ledger management.
Related: Payment Terms · Cash Flow · Working Capital Reviewed: 2026-07-15 · Sources: industry practice