What invoice factoring is
Invoice factoring is the sale of your unpaid invoices to a factoring company at a discount, in exchange for most of the cash up front. It is not a loan against your general credit. It is a purchase of receivables.
Because it is based on invoices you have already earned, the pricing leans on the creditworthiness of your customers, the businesses that owe you, rather than only on your own profile.
How the mechanics work
Two numbers describe most factoring arrangements. The advance rate is the share of the invoice you receive up front. The factoring fee is what the factor keeps for the service, often expressed for a period of time the invoice is outstanding.
When your customer pays the invoice, the factor remits the remaining balance to you, minus its fee. The faster your customers pay, the less a time-based fee tends to add up.
Recourse versus non-recourse
This is the structural detail owners should not gloss over. With recourse factoring, if the customer never pays, the risk comes back to you. With non-recourse factoring, the factor absorbs certain non-payment risk, which usually costs more.
Neither is automatically better. It depends on how reliable your customers are and how much certainty you want. It is worth asking exactly which structure any quote is.
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Apply nowWhen it tends to fit
Factoring tends to fit business-to-business companies with solid customers but long payment terms: trucking and freight, staffing, manufacturing, wholesale, and commercial service firms. It closes the gap between doing the work and getting paid.
Advance rates, fees, and structure vary by provider and by your customer mix. As a broker we can help you compare arrangements so you understand the total cost before you commit.