Invoice Factoring
Invoice factoring sells unpaid invoices to a third party for immediate cash.
In factoring, a business sells its accounts receivable to a factor at a discount and receives most of the cash upfront; the factor collects from the customers and keeps a fee. It converts slow-paying invoices into working capital without taking on debt. The cost is the factor's discount, which is higher than most loan interest — so it suits businesses with tight cash flow, not cheap financing.
Example
A manufacturer factors $100,000 of invoices, receiving $97,000 immediately while the factor collects the full amount.
Related terms
Frequently asked questions
Is factoring a loan?
No — you are selling an asset (your receivables), not borrowing. That is why factoring is available to businesses that might not qualify for a bank loan, though it costs more.
Will my customers know I factored their invoices?
Usually yes — the factor typically collects directly, so customers are notified to pay the factor. Some arrangements are confidential, but they cost more.
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