Factor

What is a factor?

A factor is a financing intermediary that purchases a company’s accounts receivable (invoices) in exchange for immediate cash. The factor pays the company a portion of the invoice value up front and collects payment from the invoiced customer. The purchase price is typically reduced by fees and commissions.

How factoring works

• A company with outstanding invoices sells one or more invoices to a factoring company.
• The factor advances a percentage of the invoice value immediately (commonly 70–90%).
• When the customer pays the invoice, the factor remits the remaining balance to the seller, minus its fee.
• Funds from factoring are not a loan and generally carry no restrictions on use.

Parties involved

• Seller: the company that issues invoices and sells them to the factor.
• Factor: the financial firm that buys the receivables and advances cash.
• Debtor/customer: the invoiced party that now pays the factor.

Fees, requirements, and timing

• Fees vary by factor and depend on factors such as customer creditworthiness, invoice age, transaction volume, and industry risk. Typical ranges are about 1%–5% per invoice but can be higher.
• Factors assess the credit risk of the invoiced customer more than the seller’s own credit.
• Funds are often advanced quickly—sometimes within 24 hours.
• Some factors require recourse (seller must cover bad debts); others offer non-recourse options at higher fees.

Types of factoring

• Recourse factoring: the seller is responsible if the customer fails to pay; fees are usually lower.
• Non-recourse factoring: the factor assumes the credit risk of nonpayment; fees are higher and may exclude fraud or dispute-related defaults.

Benefits

• Immediate cash improves short-term liquidity and working capital.
• Helps companies avoid missed payments on obligations and seize growth opportunities.
• Useful in industries with long billing cycles or rapid growth where cash conversion is slow.
• Reduces reliance on traditional debt or a strong credit history.

Drawbacks

• Generally more expensive than traditional loans or lines of credit.
• Fees reduce overall receivable value.
• Depending on the agreement, loss exposure may remain with the seller (recourse).
• Customer relationships may be affected because collections are handled by the factor.

Example

A company has a $1,000,000 invoice and sells it to a factor:
– Factor advances 80% up front: $800,000.
– Factor holds 20% reserve: $200,000.
– Factor charges a 4% fee ($40,000).
– When the invoice is paid, the factor returns the reserve minus the fee: $200,000 − $40,000 = $160,000.
– Total cash to the seller: $800,000 + $160,000 = $960,000 (net of $40,000 fee).

Is factoring right for your business?

Factoring can be advantageous if you need immediate liquidity, lack access to traditional credit, or operate in an industry with long receivable cycles. It may not be cost-effective if your business can obtain cheaper financing or if preserving full invoice value is critical. Evaluate fees, recourse terms, and how collections handled by the factor will affect customer relationships.

Bottom line

Factoring converts accounts receivable into near-term cash by selling invoices to a factor in exchange for an advance and a fee. It is a flexible working capital tool that speeds cash conversion but comes at a cost. Terms vary by provider, so compare pricing, recourse options, and service terms before choosing factoring as a financing solution.