Glossary · product

Invoice factoring

Also called factoring, accounts receivable factoring, AR factoring.

Selling receivables to a third party at a discount for immediate cash, with the buyer taking over collection from your customers.

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

A true factoring arrangement is a sale, not a loan. The factor buys the account, becomes the owner of the right to payment, notifies the account debtor to pay it directly, and collects. What the seller receives is the purchase price, paid in two parts.

The money flow

  1. You invoice the customer and submit a copy to the factor with proof of delivery
  2. The factor verifies the invoice and advances a percentage of face value
  3. The balance is held as reserve
  4. The customer pays the factor, at a lockbox or directly
  5. The factor releases the reserve less its fee and any deductions

Pricing

Usually a discount fee expressed as a percentage of invoice face value, charged either as a flat rate for a period or as a rate that steps up the longer the invoice stays out. On top of that sit wire fees, lockbox fees, monthly minimums, credit-check fees and termination fees. The headline discount rate is rarely the whole cost — total the schedule.

Recourse and non-recourse

Under recourse factoring, an invoice the customer does not pay is charged back to you after a stated period. Non-recourse means the factor absorbs the loss — but almost always only for a defined credit event, meaning the debtor's insolvency or formal bankruptcy. Everything else still comes back.

Contract terms that matter as much as the rate

Whole-ledger versus spot, minimum volume commitments, the initial term, the notice period to terminate, whether termination requires paying the minimum for the remaining term, and the factor's discretion over which invoices it will buy.

Where this one catches people

"Non-recourse" is the most oversold word in the product. It covers your customer going insolvent. It does not cover a customer who refuses to pay because the work was late, incomplete, or disputed; who takes an offset against another claim; who short-pays; or who simply drags past the recourse period. Disputes are the overwhelming majority of unpaid invoices in small business, and every one of them comes back to you. The second trap is the exit: annual auto-renew with a 60- or 90-day written notice window is standard, and missing the window binds you for another full term.

Worked through

Illustrative. A $50,000 invoice on 45-day terms, 85% advance rate, 2% discount fee for the first 30 days and 0.5% for each 10 days after.

Advance at submission: $42,500. Reserve held: $7,500.
Customer pays on day 44. Fee: 2% for the first 30 days plus 0.5% for each of the next two 10-day tranches = 3% of $50,000 = $1,500.
Reserve released: $7,500 − $1,500 = $6,000.

Total received: $48,500 on a $50,000 invoice, with $42,500 of it available 44 days early.

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

Working Capital 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… HoldbackMoney withheld from what a business would otherwise receive and applied to an obligation — the daily slice of… Ineligible receivablesInvoices a factor or asset-based lender excludes from the borrowing base entirely, so they generate no availa… InvoiceA demand for payment for goods delivered or services performed, and — once the work is genuinely complete — a… Invoice discountingBorrowing against the receivables ledger while continuing to invoice and collect in your own name, so custome… Invoice verificationThe factor's process of confirming with your customer that the work was delivered, the amount is right and no… Notice of assignment (NOA)The written notice telling a customer that its invoices have been assigned to a factor and that payment must … RecourseThe funder's right to come back to the client when the underlying obligation goes unpaid - in factoring, the …

Invoice factoring — common questions

What does invoice factoring mean?

Selling receivables to a third party at a discount for immediate cash, with the buyer taking over collection from your customers.

Where does invoice factoring catch people out?

"Non-recourse" is the most oversold word in the product. It covers your customer going insolvent. It does not cover a customer who refuses to pay because the work was late, incomplete, or disputed; who takes an offset against another claim; who short-pays; or who simply drags past the recourse period. Disputes are the overwhelming majority of unpaid invoices in small business, and every one of them comes back to you. The second trap is the exit: annual auto-renew with a 60- or 90-day written notice window is standard, and missing the window binds you for another full term.

Is invoice 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 invoice factoring apply to?

Working Capital, Invoice Financing.

Is there a worked example of invoice 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 invoice factoring?

Advance rate, Holdback, Ineligible receivables, Invoice, Invoice discounting.

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.