Invoice factoring is a form of invoice finance where a business sells its outstanding invoices to a factoring company (the factor) in exchange for an immediate cash advance â typically 70â90% of the invoice value. The factor then collects payment directly from the business’s customers. When the customer pays, the factor releases the remaining balance minus fees.
How It Works
- Business raises an invoice to its customer
- Business sells the invoice to the factor
- Factor advances 70â90% of the invoice value immediately [VERIFY current advance rate ranges]
- Factor manages credit control â chasing the customer for payment in its own name (disclosed factoring) or the business’s name (confidential factoring)
- Customer pays the factor
- Factor releases the remaining balance, minus factoring fee and discount charge
Key Features
- Credit control outsourced: The factor manages collections, which saves internal resource but means customers know the business uses a factor (in disclosed factoring)
- Bad debt protection: Non-recourse factoring includes protection against customer insolvency
- Suitable for: B2B businesses with multiple invoices, extended payment terms, or resource constraints in credit control
Invoice Factoring vs Invoice Discounting
The key difference is who manages collections. In factoring, the factor manages credit control. In invoice discounting, the business retains its own credit control and collection process â the finance is typically invisible to customers.
Related Terms
- Invoice discounting: finance against invoices where the business retains credit control
- Advance rate: the percentage of invoice value released immediately
- Recourse factoring: the business must buy back unpaid invoices
- Non-recourse factoring: the factor absorbs bad debt risk