A/R Financing / Invoice Factoring


Invoice Factoring is a form of trade financing for business-to-business (B2B) and business-to-government (B2G) sales transactions in which a business sells its accounts receivable to a third party – the factoring company – at a discounted price. The factor provides working capital to the business by advancing money against valid invoices for products sold, delivered, and accepted or for services rendered and accepted. The business in need of cash can thus accelerate its cash flow by securing a high percentage of their receivables’ face value long before the invoices are due for payment. When the invoice is finally paid, the factor remits the balance (a.k.a. the “rebate” or “reserve”) to the business minus the agreed upon factoring fee (a.k.a. the “discount”).

While many factoring companies will factor most B2B and B2G receivables and are mainly segmented by the size of the factoring volume (e.g. small, medium, large), some industry sectors do require specific expertise, processes, and procedures, and are therefore only serviced by a limited number of factoring companies that specialize in those receivables. These include construction, third-party medical, and freight-brokered trucking, as well as international receivables.

Over its many centuries in existence, factoring has become more and more mainstream and is today a preferred choice of many small business owners and large corporations. The volume of business handled by factors has increased from about $60 billion in 1993 to an estimated $150 billion in 2009. Factoring can be a useful and sensible source of funds for new, young, and established businesses. However, it is not a “seed money” option for start-ups if the business does not yet have any accounts receivable to sell.

Two of the key benefits and differences between a traditional (bank)loan and invoice factoring are that

A) qualification criteria for a loan focus on the borrower (e.g., financial strength/history, credit score, collateral, etc.) while qualification criteria for invoice factoring focus primarily on the creditworthiness of the debtor (i.e., the company that eventually pays the invoices) and

B) the financing costs of a loan are fixed costs and have to be paid regardless of the borrower’s cash flow, while invoice factoring are variable costs which are 100% controlled by the user of the factoring services and are only incurred when the service is actually used.



Click here to visit the FAQ section on Factoring.