Invoice factoring
How does invoice factoring work?
Invoice factoring is a financing arrangement in which a business sells eligible unpaid B2B invoices to a factoring company in exchange for an advance, rather than waiting for its customers to pay.
The factor typically advances a large portion of the invoice value within a day or two, then remits the remaining balance — less its fee — once the customer pays in full. Because underwriting usually focuses on the creditworthiness of the business’s customers rather than the business itself, factoring is often available to newer or thinly capitalized companies that invoice established commercial or government customers.
Recourse factoring means the business remains responsible if a customer never pays; non-recourse factoring shifts some of that credit risk to the factor, usually for a higher fee. Some programs require every invoice to be factored ("whole ledger"), while others let a business factor selectively, invoice by invoice.
Accounts receivable financing is a related but distinct structure: invoices serve as collateral for a loan or line of credit rather than being sold outright. The two are often compared side by side for the same cash-flow problem.
Commonly explored when
- Commercial or government customers pay on net-30 to net-90 terms
- Revenue is growing faster than the cash coming in from collections
- A bank loan or line of credit isn’t available yet because of time in business or financials