Receivables factoring is when a business sells its unpaid invoices (accounts receivable) to a third-party financial company (a factor) at a discount in exchange for immediate cash, boosting working capital and avoiding having to wait for payment or slow customer payments. The factor company advances a large percentage of the invoice value to the borrowing business, then the factor collects the full amount directly from the customer, keeping fees and interest, and remits the remainder. It's a financing tool to help manage cash flow, or fill in a cash flow gap or other needs that require fast-cash advance solutions often used by fast growing companies or those with slow-paying clients, or those companies that occasionally have slower customer payment commitments and is seeking a revenue solution that the business can access that capital rather then wait for customer payment yet without traditional debt. 

 

How it works

1. Sell Goods/Services: A business sells products or services on credit, creating an invoice with future payment terms (e.g., 30, 60, 90 days in the future).

2. Sell Invoice: The business sells this invoice to a factor company for immediate cash (“ typically 80-95% of the face value”).

3. Factoring Company Advances Cash: The factor pays the business the agreed-upon advance amount.

4. Collection: The factor  company goes and directly collects the full invoice amount directly from the customer.

5. Reserve Release: The factor remits the remaining balance (minus fees and interest) to the original business. 

Key benefits

• Immediate Cash Flow: Converts slow receivables into quick cash.

• No New Debt: Provides working capital without taking on loans.

• Credit Management: Factors can handle customer credit checks and collections.

• Scalability: Supports rapid growth by funding operations.

 

Types of factoring

• With Recourse: The business retains the risk of uncollectible invoices and must buy them back if the customer doesn't pay.

• Without Recourse: The factor assumes the credit risk, protecting the business from bad debt losses.