Glossary · product

Factoring

Also called invoice factoring, accounts receivable factoring, AR factoring.

Selling unpaid invoices to a third party at a discount for cash now, with the buyer collecting the money from your customer.

Drafted with AI assistance. Not yet independently checked. Nobody has verified the claims on this page against a source, so treat the figures and legal points as a starting point rather than as settled, and confirm anything you are about to act on. How we check things.

What it means

The cycle runs like this. You deliver goods or services and invoice the customer. You submit that invoice to the factor on a schedule of accounts along with proof of delivery. The factor advances a percentage of face value, typically the same day or the next. Your customer receives a notice of assignment directing payment to the factor, pays the factor on its normal terms, and the factor releases the reserve less its fee.

Because it is a purchase rather than a loan, factoring does not add debt to the balance sheet, and availability grows with sales instead of being capped by a credit line set last year. The factor's underwriting is aimed at your customers' credit rather than yours, which is why young businesses with strong customers can factor when they cannot borrow.

What it is not is unsecured or informal. The agreement is secured by a UCC-1 on receivables, usually with a blanket filing behind it, and it typically commits your whole ledger for a term.

Where this one catches people

Factoring puts your customer inside the transaction. They get a notice of assignment, they are directed to pay a company they have not dealt with, and they may get a verification call about specific invoices. In freight and staffing that is unremarkable and nobody blinks. In industries where it is uncommon, it is read as a distress signal by a customer deciding who to award the next contract to. Ask how verification is handled and whether non-notification is available before your largest account finds out from a letter.

Worked through

$100,000 of invoices sold at an 85% advance rate produces $85,000 immediately, with $15,000 held in reserve. The customer pays in 45 days. The factor deducts its fee from the reserve and releases the balance. What matters in comparing offers is the advance rate, the fee, the period the fee is charged over, and everything in the fee schedule.

Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.

Where you will meet this term

Invoice Financing

Read next

Advance rateThe share of an asset's eligible value a funder will put up front, used in factoring, asset-based lending and… DilutionThe gap between what a business invoices and what it eventually collects, caused by credits, returns, allowan… FactorThe company that buys receivables: the counterparty in a factoring relationship, and an entirely different th… Factoring commissionThe factor's charge for buying an invoice, quoted as a percentage of face value for a defined period and char… Full recourseThe arrangement in which the seller of a receivable, or the borrower, carries the loss if the money never arr… Notice of assignment (NOA)The written notice telling a customer that its invoices have been assigned to a factor and that payment must … ReserveThe portion of an invoice's face value a factor holds back at funding and releases, less fees, once the custo…

Factoring — common questions

What does factoring mean?

Selling unpaid invoices to a third party at a discount for cash now, with the buyer collecting the money from your customer.

Where does factoring catch people out?

Factoring puts your customer inside the transaction. They get a notice of assignment, they are directed to pay a company they have not dealt with, and they may get a verification call about specific invoices. In freight and staffing that is unremarkable and nobody blinks. In industries where it is uncommon, it is read as a distress signal by a customer deciding who to award the next contract to. Ask how verification is handled and whether non-notification is available before your largest account finds out from a letter.

Is factoring the same as an interest rate?

No. It is a multiplier applied once to the amount funded, with no time dimension. An interest rate is charged per unit of time on a balance that changes.

Which products does factoring apply to?

Invoice Financing.

Is there a worked example of factoring?

Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.

What else should I read alongside factoring?

Advance rate, Dilution, Factor, Factoring commission, Full recourse.

Has this definition been checked?

Not yet. This entry is drafted and live, and the notice at the top says so. Confirm anything you are about to act on.

Is this legal advice?

No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.

Can I suggest a term?

Yes — [email protected]. The glossary grows from what people are actually shown in contracts.