Definitions

When a business completes work or delivers goods, it issues an invoice to its customer and waits for payment. Invoice factoring allows the business to convert that unpaid invoice into working capital by selling the receivable to a factoring company.

The factoring company advances a percentage of the invoice value and collects payment from the customer when the invoice becomes due.

Factoring companies typically advance a portion of the invoice value when the invoice is submitted. The remaining balance is held as a reserve until the customer pays the invoice.

Advance rates vary depending on the industry, the creditworthiness of the customer responsible for payment, and the structure of the factoring agreement.

When a factoring company advances funds against an invoice, it usually retains a percentage of the invoice value as a reserve. 

Once the customer pays the invoice, the factoring company releases the reserve to the business after deducting the agreed factoring fee. 

Common payment terms include Net-30, Net-45, or Net-60, meaning the customer is expected to pay within 30, 45, or 60 days. 

These terms influence how long invoices remain outstanding and may affect factoring pricing structures

Factoring fees are usually calculated based on the invoice value and the amount of time it takes the customer to pay the invoice. 

This structure differs from traditional interest-based lending because the fee is tied to the receivable rather than a borrowed balance. 

Businesses comparing factoring providers can learn more about how pricing works in the Factoring Cost Guide. 

In a recourse factoring arrangement, the factoring company advances funds against invoices but the business retains responsibility if payment cannot be collected due to disputes or other issues. 

Recourse factoring is the most common structure in many industries. 

In non-recourse arrangements, the factoring company may assume certain credit risks related to an approved customer’s inability to pay. 

Because this structure transfers additional risk to the factoring company, non-recourse programs may involve more conservative credit policies. 

Under a notification structure, the invoice indicates that payment should be directed to the factoring company. This process becomes part of the standard payment procedure once the factoring relationship is established. 

Notification factoring is the most common structure used across industries. 

Accounts receivable represent the revenue a business has earned but has not yet collected. 

Factoring companies use these receivables as the primary collateral when providing funding. 

In factoring terminology, the debtor is the company or organization that owes payment for the goods or services provided. 

Factoring companies evaluate the debtor’s creditworthiness when determining whether to approve invoices for funding. 

Factoring companies typically establish credit limits for individual customers after reviewing their financial stability and payment history. 

Invoices issued to approved customers within those limits can be funded through the factoring program.