Invoice Factoring
Definition
Invoice factoring is a financing arrangement where a business sells its outstanding invoices (accounts receivable) to a third-party company (the factor) at a discount in exchange for immediate cash. The factor advances 80–95% of the invoice value upfront and collects payment directly from the business's customers. Once the customer pays, the factor releases the remaining balance minus their factoring fee (typically 1–5% per month). Invoice factoring is not a loan — it's a sale of an asset. This distinction means it doesn't create debt on the balance sheet and approval is based on the creditworthiness of the business's customers, not the business itself.
Example
A construction company completes a $200,000 job but the general contractor won't pay for 60 days. The company factors the invoice at 90% advance rate with a 3% monthly fee. They receive $180,000 immediately, and when the GC pays in 60 days, they receive the remaining $20,000 minus $12,000 in fees ($6,000/month × 2 months) = $8,000.
Related Terms
Advance Rate
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Working Capital
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