Accounts Receivable Factoring

Category: finance

The practice of selling unpaid customer invoices to a third-party financing firm at a discount for immediate cash.

The "factor" company advances roughly 80-90% of the invoice value immediately and assumes the responsibility of collecting payment from the customer. Once paid, the factor returns the remaining balance minus their processing fee (typically 1-5%).

Common Examples

• By executing an accounts receivable factoring agreement, the manufacturing plant unlocked instant liquidity from their net-60 commercial accounts.
• Factoring can be structured as non-recourse, meaning the factor absorbs the loss if the underlying customer hits a bankruptcy wall.