Accounting
Invoice factoring
Invoice factoring is a financing method where a business sells its unpaid invoices to a third party (a factor) at a discount to get cash immediately instead of waiting for customers to pay.
How invoice factoring works
With factoring, a business sells its outstanding invoices to a factoring company. The factor advances most of the invoice value up front (often 80–90%), then collects payment directly from the customer. When the customer pays, the factor releases the remaining balance minus its fee.
It’s popular in industries with long payment terms — like trucking, staffing, and manufacturing — where waiting 30 to 90 days for payment strains cash flow.
Factoring vs. financing
With factoring, you sell the invoices and the factor usually collects from your customer. With invoice financing (or discounting), you borrow against the invoices but keep collecting yourself. Factoring trades a fee for immediate cash and offloads collections; financing keeps the customer relationship in your hands.
The cost is a factoring fee — typically a small percentage of the invoice value, sometimes rising the longer the invoice stays unpaid.
Example: A trucking company has $50,000 in unpaid 60-day invoices. It factors them, gets ~$42,500 immediately, and the factor collects the full $50,000 from the brokers, keeping its fee.
FAQs
Frequently asked questions
How much does invoice factoring cost?
Factoring typically costs a small percentage of the invoice value (a factoring fee), which can increase the longer the invoice remains unpaid. Terms vary by factor and industry.
What’s the difference between factoring and invoice financing?
With factoring you sell the invoices and the factor collects from your customer; with invoice financing you borrow against the invoices but keep collecting payment yourself.
Related terms
Accounts receivable
Accounts receivable (AR) is the money customers owe a business for goods or services that have been delivered and invoiced but not yet paid for.
Past-due invoice
A past-due invoice is an invoice that has not been paid by its due date, making the balance overdue.
Invoice payment
An invoice payment is the funds a buyer sends to a seller to settle the amount owed on an invoice, by or before its due date.
Put it into practice
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