Invoice factoring solves a specific problem: your customer will pay in 30, 60, or 90 days, but your expenses are due now. A factoring company buys your outstanding invoices and advances most of their value immediately.
Factoring is a sale of receivables, not a loan : the factor collects directly from your customers under most arrangements.
How it generally works
You submit an invoice from a creditworthy customer. The factor advances a large percentage of the invoice value : commonly a substantial majority : and holds the remainder in reserve.
When your customer pays the factor, the reserve is released to you, minus the factor's fee. Ongoing facilities often work as a revolving arrangement on new invoices.
Common uses
- Trucking and freight companies waiting on shipper or broker payments
- Staffing firms covering payroll between client payments
- Wholesalers and distributors managing long customer payment terms
- Service businesses with slow-paying commercial clients
- Growing companies whose receivables grow faster than their cash
Qualification factors providers commonly review
- The creditworthiness of your customers, more than your own credit
- Invoices owed by creditworthy commercial customers
- Absence of liens or claims that would interfere with collecting the receivables
- Accuracy and documentation of the invoices
Potential advantages and trade-offs
Advantages: immediate cash without adding debt, qualification based on customer credit, and capacity that grows with your invoicing.
Trade-offs: fees reduce the total collected, your customers deal with the factor's collection process, and funding depends on having qualifying receivables.
How repayment and fees typically work
There is no traditional repayment : the factor collects from your customers. Costs are charged as a factor fee, which may be flat or increase the longer an invoice remains unpaid. Understand exactly how the fee accrues before signing.