Definition
Invoice factoring is a form of invoice finance where a business sells or assigns its unpaid invoices to a factoring provider, which advances a percentage of their value upfront and usually collects payment from the customers directly. When customers pay, the provider deducts its advance and fees and passes the balance to the business. Customers are usually aware of the arrangement.
Factoring turns invoices into cash and hands the job of collecting them to someone else.
How it works
You raise an invoice, submit it to the factor and receive an agreed percentage upfront. The factor manages collection, your customer pays the factor, and you receive the balance less fees.
Pros and cons
Factoring can suit smaller or growing businesses that want help with collections and funding that grows with sales. The trade-offs are cost, the fact that customers know, and contract terms such as minimum fees and notice periods.
Check the costs
Pricing tends to have two parts: a fee for running the ledger and a charge on funds drawn until the customer pays. The invoice finance cost calculator shows the cost per $100 advanced. Our invoice finance review compares factoring with discounting. To explore it, make one enquiry.
Common questions
Will my customers know I use factoring?
Usually yes, because the factor collects payment directly. If confidentiality matters, ask about invoice discounting.
What if a customer doesn't pay?
Under recourse factoring you usually have to repay the advance or replace the invoice. Non-recourse arrangements shift some credit risk to the provider, at a cost.
Sources and further reading