Factoring

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Factoring is a form of financing in which a business sells its unpaid customer invoices to a third party, called a factor, at a discount, in exchange for immediate cash.

Businesses that sell on credit often wait 30, 60 or 90 days to be paid. Factoring turns those invoices into cash straight away, improving cash flow.

The factor typically advances a large share of the invoice value immediately, then pays the rest, minus fees, when the customer pays. For example, a business sells invoices worth 100,000. The factor advances 85,000 immediately. When the customers pay, the factor releases the remaining 15,000, minus a fee of 2,000, so the business receives 98,000 in total.

In many factoring arrangements, the factor collects payments directly from customers. In recourse factoring, the business must buy back invoices that customers fail to pay. In non-recourse factoring, the factor bears the risk of non-payment, usually for a higher fee.

Factoring is common in industries such as manufacturing, wholesale, staffing and transport. It differs from invoice discounting, where the business borrows against its invoices but keeps control of collecting payments, often without customers knowing.

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