Factoring is selling your unpaid invoices to a finance company, called a factor, for most of their value in cash now, instead of waiting weeks or months for your customers to pay. The factor advances you the bulk of each invoice straight away, then collects the full amount from your customer and pays you the rest, minus its fee. It is also known as invoice factoring or debt factoring.
The appeal is simple: it turns money you have earned but cannot yet spend into working capital today. For a business where cash is tied up in a growing pile of receivables, factoring closes the gap between doing the work and getting paid for it. It is not a loan, so it does not add debt to your balance sheet in the usual sense; you are selling an asset, your invoices, rather than borrowing against them.
You sell the invoice.A factor pays you most of its value upfront, then collects from your customer directly.
The factor chases payment.Collection moves to them, which is the main thing that sets factoring apart from invoice discounting.
Speed has a price.You give up a few percent of each invoice, so it suits real cash-flow gaps, not chronic late payment.
You raise an invoice as normal, then sell it to the factor rather than waiting for the customer to pay. The factor advances a chunk of the value at once, takes over collecting the debt, and squares up with you when the customer settles. In practice it runs in four steps.
You deliver the goods or service and raise an invoice on normal credit terms, say net 30 or net 60.
You assign the invoice to the factor, who verifies it and advances an agreed percentage, often 80 to 90%.
Your customer pays the factor directly by the due date, so chasing the debt is no longer your job.
Once the customer pays, the factor releases the held-back balance to you, minus its fee.
Because the factor collects directly, your customers usually know factoring is in place: this is called disclosed factoring, and it is the norm. Factors also look closely at your customers' creditworthiness, not just yours, because the advance is only as safe as the people who owe the money. A book of reliable customers earns a higher advance rate and a lower fee.
Factoring usually costs a factoring fee of around 1 to 5% of each invoice, sometimes with a separate interest charge on the funds advanced, so the all-in cost depends on the invoice size, your customers' credit quality, and how long they take to pay. The longer the invoice takes to settle, the more it costs, which is the whole reason factoring is a treatment for slow payment rather than a cure. Use the calculator to see what an invoice would net you.
Defaults show a typical small-business deal. Fees vary widely by provider and customer credit. General information, not financial advice.
The fee is the real cost; the advance rate just controls how much of your own money you get now versus later. For a deeper breakdown across different terms, the invoice factoring calculator compares scenarios side by side. And remember the cheaper lever: every day you shave off how long customers take to pay is a day of factoring fees you never incur, which is exactly what tighter accounts receivable software is built to do.
With recourse factoring you must buy back any invoice the customer never pays, so you keep the bad-debt risk and pay a lower fee; with non-recourse factoring the factor absorbs that loss, so it costs more. This is the single biggest choice in a factoring deal, because it decides who is left holding the loss when a customer defaults. Most cheaper, everyday factoring is recourse.
| Recourse factoring | Non-recourse factoring | |
|---|---|---|
| Who bears bad debt | You do, if the customer never pays | The factor absorbs the loss |
| Cost | Lower fee | Higher fee |
| Best for | Reliable customers, cost-sensitive sellers | Protection against a customer default |
| Common? | The usual, default arrangement | Less common, often with conditions |
Read the small print on non-recourse: the protection often only covers a customer's outright insolvency, not a disputed or simply unpaid invoice, so it is narrower than it sounds. For most small businesses with a solid customer base, recourse factoring is the cheaper and sensible default.
The core difference is who collects the debt: with factoring the provider takes over collections and your customers usually know, while with invoice discounting you keep collecting and the arrangement is typically confidential. Both raise cash against unpaid invoices, but they feel very different to your customer and to your own team.
| Aspect | Factoring | Invoice discounting |
|---|---|---|
| Who collects | The provider takes over collections. | You keep collecting yourself. |
| Customer awareness | Usually disclosed, customers know. | Typically confidential. |
| Best suited to | Smaller firms wanting chasing taken off their plate. | Established firms with their own credit control. |
Both sit under the wider umbrella of receivables financing, and a buyer-led variant flips the whole arrangement around in reverse factoring, where the customer, not the supplier, sets it up. For the large-scale capital-markets version, see securitisation of receivables.
Factoring makes sense when you have sound invoices to creditworthy customers but a real timing gap between paying your costs and getting paid, and that gap is holding the business back. The honest test is to weigh the fee against what the early cash earns you.
Funding a fast-growing order book you cannot bankroll from cash.
Covering payroll while large customers take 60 days to pay.
Smoothing a seasonal swing in working capital.
Winning a contract or capturing a bulk-buy discount the early cash unlocks.
Factoring every invoice every month just to stay afloat.
Plugging a hole that firmer follow-up would close.
Masking slow collection or loose credit terms, which are cheaper to fix directly.
Renting your own money back at a premium as a permanent habit.
Classic good cases share one trait: the receivable is solid, you just cannot wait for it. If an advance wins a contract or captures a discount, the maths can work well; if it just plugs a hole that firmer follow-up would close, tighten collections instead.
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