Invoice Factoring
Selling unpaid invoices to a third party at a discount for immediate cash.
Definition
Invoice factoring (or accounts receivable factoring) is selling your unpaid invoices to a factoring company at a discount—typically 70-90% of face value upfront, with the remainder (minus fees) paid when the customer pays. The factoring company assumes collection responsibility.
This provides immediate cash without taking debt, but costs 1-5% per month in fees. It's useful for businesses with cash flow gaps due to slow-paying customers.
Why It Matters
Factoring converts receivables into immediate cash, solving cash flow problems without loans. However, it's expensive—annualized factoring fees can exceed 20%. It's best for temporary cash crunches, not long-term financing.
Factoring relationships can affect customer perceptions since the factoring company handles collections. Some customers dislike being contacted by third-party collection entities.
Examples
- 1
Business factors $100,000 in receivables: receives $80,000 immediately, $18,000 when customer pays (30 days), factoring company keeps $2,000 (2% fee).
- 2
Construction company factors slow-paying government invoices to meet payroll while waiting for payment.
- 3
Staffing agency uses factoring: invoices clients on net-60 terms but needs cash weekly to pay temporary workers.
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