Information about factoring

A business sells unpaid accounts receivable invoices to a specialized financial institution or Factor. That’s called invoice factoring. The factoring company buys the invoice from the business for an amount less than its actual value, and then later collects the full amount of the invoice from the account debtor when it finally comes due. This service is useful to a business that cannot afford to wait 30, 60, or 90 days to collect payment from customers, because cash is needed immediately for growth or health of the company.

When a business delivers goods or a service to another business, an invoice is generated stating the amount owed and the terms (number of days) in which the invoice must be paid. This invoice along with its terms becomes an account receivable: money owed to a business, by a business, for goods or services delivered. The terms for these invoices are usually 30, 60, or even 90 days. After the business sends out the invoice it must wait the length of the term (or longer) to collect the debt and recognize the revenue generated. Waiting for these long billing cycles to close can be difficult for a company that is growing fast or just struggling to survive. Rather than waiting for long billing cycles to close, a business has the option to sell some or all of its outstanding invoices to a Factor (at a discount) and receive cash, upfront, immediately. The Factor will eventually collect the full amount of the invoice from the account debtor and return a portion of the discounted amount.