Glossary
What is invoice factoring?
Invoice factoring means selling unpaid invoices to a finance company for fast cash. Learn how it works, what it costs and what to try first.
Updated · By PayToMe Editorial
Invoice factoring is when a business sells its unpaid invoices to a finance company, called a factor, at a discount in return for immediate cash. The factor then collects payment from your client. It turns money you are owed into money you can use today.
How it works
- You invoice as normal. Say you finish a job and send an invoice with net 30 terms.
- You submit the invoice to the factor. The factor checks your client’s credit, since the client is the one who pays.
- You get an advance. The factor commonly pays a large share of the invoice value upfront, such as 80 to 90 percent.
- The client pays the factor on the due date.
- You receive the rest, minus fees. The factor releases the held balance after deducting its charge.
Fees vary widely. Some factors charge a flat percentage per invoice, others charge a rate that grows the longer the invoice stays unpaid. Look at the total dollar cost, not the headline rate, and ask about setup fees, minimums and what happens on late payments.
Example
You bill a client $10,000 on net 30 terms. Your factor advances 85% and charges 3% of the invoice for 30 days. These numbers are illustrative.
| Item | Amount |
|---|---|
| Invoice | $10,000 |
| Advance on day 1 (85%) | $8,500 |
| Factor fee (3%) | $300 |
| Balance paid after client pays | $1,200 |
| Total you receive | $9,700 |
You gave up $300 to receive $8,500 about 30 days sooner. If that cash lets you pay a supplier on time or take another job, it may be worth it. If your cash flow is fine, the same $300 is a pure cost.
Cheaper things to try first
Factoring is one option on a longer list. Before you sign, consider shorter terms, a deposit up front, or early payment discounts. Reminders also help, and our guide to getting paid faster covers them. You can build clear terms into your invoice with the free invoice generator.
Related terms
- Accounts receivable: the money clients owe you, which factoring converts to cash.
- Cash flow: the timing of money in and out, which is the problem factoring tries to solve.
- Net 30: the payment terms that often create the gap factoring fills.