What Is Invoice Factoring?

The Simple Definition

Invoice factoring (also known as accounts receivable factoring) is a financial transaction where a business sells its unpaid invoices to a third-party financial company—known as a factor—at a discount.

Instead of waiting 30, 60, or 90 days for your corporate customers to pay, the factoring company gives you up to 90% of the invoice value immediately. This provides your business with instant cash flow to cover payroll, buy materials, and take on new work.

How Does Factoring Work?

Let's look at a typical B2B transaction:

1. You provide a service: You deliver goods or services to your B2B customer.
2. You issue an invoice: You generate an invoice for $10,000 with Net-30 terms.
3. You sell the invoice: You submit the invoice to Factoring My Invoice.
4. You get an advance: We immediately deposit $9,000 (a 90% advance) into your bank account. The remaining $1,000 is held in reserve.
5. Your customer pays: After 30 days, your customer pays the $10,000 invoice directly to us.
6. You get the reserve: We take our small factoring fee (e.g., $300) from the reserve and send the remaining $700 to you.

Is Factoring Right for Your Business?

Factoring is an excellent fit for B2B (Business-to-Business) companies that have solid profit margins but suffer from cash flow gaps due to long payment terms. It is heavily utilized in industries such as:

• Trucking & Transportation
• Staffing Agencies
• Construction & Trades
• Manufacturing & Wholesale

Recourse vs. Non-Recourse Factoring

When researching factoring, you will encounter two main types:

• Recourse Factoring: You (the business owner) are ultimately responsible if your customer fails to pay the invoice. If they go bankrupt, you must buy the invoice back from the factoring company. This is the most common and least expensive option.
• Non-Recourse Factoring: The factoring company assumes the credit risk. If your customer goes bankrupt and cannot pay, the factoring company takes the loss, not you. This provides peace of mind but carries a slightly higher fee.