What Is Invoice Factoring?

Invoice factoring is when you sell your unpaid invoices to a factoring company (a factor) to get cash now instead of waiting for clients to pay. The factor pays you most of the invoice value upfront, collects the full amount from your client, then pays you the rest minus its fee.

Businesses factor invoices when they have to pay staff, materials or rent before slow-paying clients settle, which is common with net 60 or net 90 terms from larger companies. Factors judge your clients' credit more than yours, so a young business with reliable clients can often qualify.

Read the terms closely. With recourse factoring, you must buy the invoice back if the client doesn't pay. With non-recourse factoring, the factor takes that risk and charges more for it. Your client will usually know, because they are told to pay the factor. Invoice financing is a related option: you borrow against your invoices but keep collecting from clients yourself.

Factoring costs money on every invoice. Before you sign, check whether shorter payment terms, a deposit or prompt reminders would close the same cash gap.