cashflow
Invoice Factoring
Selling outstanding invoices to a third party for immediate cash, at a discount.
Definition
Invoice factoring is a financing arrangement where you sell unpaid invoices to a factor (a finance company) for immediate cash - typically 80-90% of face value upfront, with the remainder (minus the factor's fee, ~1-5%) paid when the customer pays. It's expensive money compared to bank credit, but accessible when bank credit isn't. Useful when you have strong customers with long payment terms (net 60, net 90) and need to bridge the gap. Common in businesses with concentrated customer bases (government, large enterprise).
In your business
- →Use factoring as bridge financing, not as a permanent funding source - the cost is too high
- →Compare the cost per dollar to alternatives (line of credit, supplier extension) before factoring
- →Watch out for recourse factoring - if the customer doesn't pay, you still owe the factor