Invoice Factoring Definition | Business Lending Glossary
What is invoice factoring? Clear explanation of how factoring works, the difference from a loan, costs, and which businesses benefit most.
Definition
A financing arrangement where a business sells its unpaid invoices to a third party (the factor) at a discount in exchange for immediate cash.
Explanation
In invoice factoring, you sell your outstanding invoices to a factoring company for an immediate advance — typically 70% to 90% of the invoice value. The factor then collects the full payment directly from your customers when the invoice comes due. Once the customer pays, the factor remits the remaining balance to you, minus their fee (the discount rate). Factoring is not a loan — it is a sale of a receivable asset. This distinction means it does not create debt on your balance sheet and may not require a credit check of your business, since the factor's underwriting is focused on your customers' creditworthiness.
Example
A staffing agency has $200,000 in outstanding invoices from creditworthy corporate clients. A factoring company advances 85% ($170,000) immediately, collects $200,000 from the clients over the next 45 days, and remits the remaining $30,000 minus a 3% discount fee ($6,000) — a total net gain to the staffing agency of $194,000 on $200,000 of invoices.
Why It Matters
Invoice factoring converts slow-paying receivables into immediate cash without taking on traditional debt. It is particularly valuable for B2B businesses with long payment cycles — staffing, construction, logistics, and professional services — where waiting 60–90 days for payment creates cash flow strain.
Frequently asked questions
What is the difference between invoice factoring and invoice financing?
Invoice factoring involves selling your invoices outright; the factor collects from your customers directly. Invoice financing (also called AR lending) uses your invoices as collateral for a loan but you remain responsible for collecting from customers and repaying the advance.
Will my customers know I'm using a factoring company?
In notification factoring (the most common type), your customers are notified to pay the factoring company directly. In non-notification factoring, you collect payments and remit them to the factor — though this is less common and typically more expensive.
