Invoice Factoring
Selling unpaid invoices to a third party at a discount for immediate cash.
Definition
Invoice factoring is a financing method where you sell your unpaid invoices to a factoring company at a discount, receiving immediate cash instead of waiting for customer payment. The factoring company then collects payment directly from your customers. You typically receive 80-90% of the invoice value upfront, with the remainder (minus fees) paid when the customer settles.
Factoring differs from invoice financing (a loan against receivables) in that you're actually selling the invoices. The factoring company assumes collection responsibility and credit risk. This can be recourse (you're responsible if customers don't pay) or non-recourse (factor absorbs the bad debt risk).
Why It Matters
Factoring provides immediate cash flow without taking on debt. For businesses with long payment cycles or rapid growth, waiting 30-60-90 days for payment can be crippling. Factoring converts receivables to cash within days, enabling you to pay suppliers, meet payroll, or invest in opportunities.
The cost of factoring (typically 1-5% of invoice value) must be weighed against the benefit of immediate cash. For some businesses, the improved cash flow and eliminated collection burden is worth the cost. For others, traditional financing might be more economical.
Examples
- 1
A staffing agency factors $100,000 in invoices, receiving $85,000 immediately and the remaining $12,000 (minus 3% fee) when clients pay.
- 2
A manufacturer uses non-recourse factoring to eliminate bad debt risk on international receivables.
- 3
A growing business factors invoices during rapid expansion to fund inventory purchases, then stops factoring once growth stabilizes.
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